This article on SMH online today got me thinking about how we treated financial institutions in Australia during the Global Financial Crisis.
The article talks about the long-term impact of the Japanese Government repeatedly bailing out JAL over the years. JAL was considered too important to fail, at least in part for reasons of national pride and confidence.
For different reasons, the Australian Government stepped in and assisted the big banks during the GFC with credit guarantees. By excluding smaller institutions from this support, the message was sent that the big banks are too important to fail so will be propped up as necessary. Essentally, the risk was nationalised without the profits. The JAL case gives some insight to the long-term impact of these decisions, with investors (and banking execs?) now aware of the likely response if the major banks face closure in the future. I’m no economist and should be called out if wrong, but it seems that this would encourage risky investment and instability.
Some form of action was clearly required and I for one am grateful that unemployment was not allowed to skyrocket as it could have. But now, with the pressure on the panic button releasing, what can be done to avoid the creation of Japanese style “ghost-banks”?
My knee-jerk response is that if bank cannot be allowed to fail, then the right to operate for profit should be removed (i.e. Government ownership). But instead of ownership of the assets, perhaps we can look at ownership of risk. In this case, the need is to clamp down on the risky behaviour by banks that are deemed too large to fail. Make the implied Government insurance explicit, and strictly regulate the risky behaviour. Leave the risky behaviour to those organisations that don’t expect to be rescued and will therefore price risk appropriately.
Likely to happen?