Making it safe to go swimming: Basic considerations in creating alternatives to megabanks

1. Making it safe to go swimming:Basic considerations in creating alternatives to megabanks Gary Dymski Professor, Leeds University Business School University of Leeds g.dymski@leeds.ac.uk Transforming Finance: 10 May 2013

2. Making it safe to go swimming Basic considerations in creating alternatives to megabanks: • Understanding what the crises of 2007-2013 have done to prospects – why relocalization is a flavor-of-the-week, why it is risky • Creating space for alternatives that can work: backing off the megabanks, empowering the local alternatives

3. 1. What the crises have done • Subprime/banking crisis of 2007-09 • Macro austerity in UK and Europe 2010-13

4. 1. What the crises have done • Subprime/banking crisis of 2007-09 • Megabanks received too-big-to-fail protection and subsidies • Many smaller banks failed or were merged • Many families lost homes and/or wealth (on paper or in their homes) • Macro austerity in UK and Europe 2010-13

5. 1. What the crises have done • Subprime/banking crisis of 2007-09 • Macro austerity in UK and Europe 2010-13 • Cuts in government transfers and spending are slowly squeezing local economies, leading to business closure, job cuts • European macro slowdown is squeezing UK exports • Quantitative easing: a continuing implicit equity injection & interest-margin boost for megabanks

6. 2. Creating space for local banking alternatives • Rules for megabanks • Opportunities for banking alternatives

7. Behavioral implications of TBTF • Goldman Sachs’ CEO Lloyd Blankfein’s statement to the US Financial Crisis Investigation Commission in early 2010: “In our market-making function, we are a principal. We represent the other side of what people want to do. We are not a fiduciary. We are not an agent. Of course, we have an obligation to fully disclose what an instrument is and to be honest in our dealings, but we are not managing somebody else’s money” (FCIC, 2010, page 27).

8. 2. Creating space for local banking alternatives • Rules for megabanks • Require megabanks to act as fiduciaries for their depositors, not as principals pursuing their own gain • Outlaw predatory lending by banks and bank subsidiaries and non-bank lenders • Link subsidies received through crisis bailouts or QE to contributions to “green opportunity” credit programs • Set limits on megabanks’ real-time leverage, including off-balance sheet position-taking • Eliminate megabanks’ monopoly over use of markets for liquidity as vehicles for speculative position-taking • Opportunities for banking alternatives

9. 2. Creating space for local banking alternatives • Rules for megabanks • Opportunities for banking alternatives • Restore adequate cash-flows to lower-income and working class communities through reversal of cuts in social/health services, renewal of the right to housing (and programs to implement this) • Establish “greenlining” programs and Community Reinvestment requirements for all institutions • Link financial literacy with anti-predatory finance enforcement • Design programs with adequate scale to generate and capture spillovers