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Global Banking: What Should Be Done?

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- U.S. bank purchases, packaging and trading of mortgages and their derivatives in late 2008 resulted in the U.S. banking collapse and the global recession. European bank purchases and packaging of Greek and other sovereign debt is close to causing another global meltdown. That leads to the question posed by the title: What should we do about it? In the following article, I consider several viewpoints on what should be done.

The Bhidé and Lounsbury Suggestions

In a New York Times op-ed piece , Prof. Amar Bhidé recommends:

  • governments should fully guarantee all bank deposits;
  • governments should impose much tighter restrictions on risk-taking by banks;
  • banks should be forced to shed activities, like derivatives trading, that regulators cannot easily examine.

John Lounsbury, managing editor and co-founder of Global Economic Intersection has suggested:

    "...the depository function of banks should be regulated as are public utilities. That public utility function is in fact institutionalized by the FDIC within the depository limits of that program. The investments associated with such deposits should be regulated to a much higher security/risk standard than many other forms of banking traditionally known as investment banking. It is only logical that the public utility should be segregated from the investment banking activities."

Guaranteeing Bank Deposits

Felix Salmon has argued that bank deposits need not be guaranteed. He sees little chance of a run on banks, either in the U.S. or Europe. I think he is crazy, particularly as it applies to Europe. I quote from one of my recent pieces :

    "A bank run occurs when depositors, worried about the safety of their deposits, pull them out. This causes real problems inasmuch as most banks keep less than 10% of their deposits in cash. So what would I do if I had euros deposited in any eurozone bank? That is easy. I would pull them out immediately and stuff them under a mattress.

Why? What if Greece decides it has to get out of the eurozone and go back to its own currency? Yes, there is a way that I described in a recent article whereby you could keep your euros and they would become interchangeable with the new currency at market rates. But do I trust the Greek, or any other European government, to implement such a program? No."

In my view, the danger of bank runs in several of the EUR countries is quite high. And the very last thing any country needs is a bank run: Deposits cannot be covered and citizens panic. The best way to at least mitigate the chances for bank runs is to guarantee deposits.

Tighter Restrictions on Risk-Taking

Both Bhidé and Lounsbury believe risks should be lowered and more tightly regulated in depository banks.

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