Seat Belts, Cycle Helmets and Bank Regulation

A couple of years ago I saw a study that looked at whether wearing a helmet while cycling reduced a cyclist’s chances of being killed in an accident while on their bike.

As I recall it did but there were two competing factors. The obvious one was that helmetted cyclists who suffered an impact to their heads were less likely to experience a serious injury than their bare-crowned colleagues. The other was that cyclists who wore helmets seemed to be more likely to have an accident – the theory being that putting a helmet on made the cyclists less worried about potential injury and less likely to cycle as carefully.

Whether or not that is the case, it doesn’t sound implausible. If I were driving a big, modern 4×4 with modern seat belts, airbags, side impact bars, crumple zones etc. I might well drive differently than if I were driving a rickety, 1960s rust bucket with no seat belts, no airbags and a massive spike poking out of the steering wheel, ready to impale me in the event of the slightest impact.

While adding safety features is welcome we should not discard the flip-side of the coin that attitudes could become less risk-averse as a consequence. People might well believe that the problem is solved to a much higher degree than it really is and therefore discard a risk that previously they took very seriously.

At the moment the government is looking closely into proposals by the banking commission that would bring new regulative and punitive measures to our banks. These include things like spreading bankers’ bonuses over a period of up to 10 years, and putting them in prison if they are “reckless”.

While I welcome proposals that might help to ensure a safer banking system, I don’t think either of these achieves an awful lot to prevent a future financial crisis. The primary problem that we need to address is not whether we can put a banker in prison if they bring down a bank and not whether a banker receives £1m today or £100k per year for the next 10 years.

The primary problem is that almost five years after Lehman, we still have no way to let a major bank go bust without taking down the global economy. As I said, new ideas for how to better regulate banks are welcome but irrespective of what they are, we should be in no doubt that the banks of the future will always find new and more exciting ways to go bust. Faith in the idea that we can make regulations to avoid this scenario is misplaced. A much more useful area on which to focus our attention would be a reform of the banking system in such a way that a bank is never “too big to fail” and if the worst happens and a bank does go bust, the world economy is left intact afterwards.

That is not what these proposals are addressing though and my major concern is not just that they might well be far less effective than the government thinks; it’s that if we implement them, we’ll relax, and (with our cycle helmet and seat belt in place), pat ourselves on the back and think we have truly solved the problem. We won’t have though. A bank, irrespective of regulation, will always be able to go bust. If we are going to learn just one thing about the causes of the financial crisis it should surely be this and it would be really nice if we properly addressed that problem now.

The alternative is that we wait for the next financial crisis to convince us.

RedEaredRabbit