Shotgun marriages raise risk of future financial blowups

The only body that seems to be making sense on the future shape of finance is the Bank for International Settlements, the Basel, Switzerland-based institution that acts as a kind of central bank for central banks. The BIS's opinions carry particular weight because of its track record as a fairly vocal Cassandra during the credit boom.

“Banks must resume lending, but they must also adjust by becoming smaller, simpler and safer,” the BIS said in its annual report this week. “Government rescue packages implemented so far appear to be hindering rather than aiding this needed adjustment. By helping banks obtain debt financing and capital, rescue packages allow managers to avoid the hard choices needed.”

Because holes in the banking system are stuffed full of our money, courtesy of the largess of our elected representatives, banks are able to ignore the need to reduce their balance sheets and stop owning risky assets. Moreover, the BIS says arranging shotgun marriages among failing institutions is “creating financial institutions so big and complex that even their own management may not understand their risk exposures.”

That's a scary scenario, made even more frightening by the inability of regulators to face up to their responsibilities in helping to curb the excesses that plunged the world into crisis.

“We must be realistic about what intelligent cooperation can achieve,” U.K. Financial Services Authority Chairman Adair Turner said this week. “I do sometimes worry that there is a bit of a disconnect between grand political statements at G-20 or other meetings and what we are going to achieve.”

There's nothing grand or political about wanting a safe and secure banking industry. There's no disconnect between politicians demanding higher standards and ordinary folk expecting their deposits to be looked after and their taxes used for better things than bolstering banks. And there's nothing clever about the Harry Houdini-style escapology that the finance industry is attempting as governments try to rein in the profligacy of recent years.

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