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payment to the banking industry even though the majority of
taxpayers object, in principle, to making such payments and
did not know before the banking crisis that they might have to
meet these costs. It is unfair to make one group of people pay
for the damage incurred by another group in this way. Some
would even argue that this is immoral.
3) The transfer of funds is progressive, not regressive
A further important feature of insurance is that the
materialisation of the risk results in a progressive transfer
of resources from the more fortunate to the less fortunate.
The transfer of funds helps the less fortunate to cope with
the consequences of the risk occurring. Privately organised
insurance indemnifies the victims of the disaster out of the
pool of funds created from premiums paid by all those insured
(including those who have not suffered from the disaster).
With public or social insurance the less fortunate, such as
the sick, elderly or unemployed, are paid out of the social
insurance fund that all healthy, employed citizens have to
contribute to. These examples represent a progressive and just
way of collectively dealing with the occurrence of certain risks.
Taxpayer-funded bank bailouts do not, however, have this
feature, and in fact the bank bailouts in the wake of the
global financial crisis represented a regressive redistribution of
resources, since taxpayers (many of whom are not necessarily
wealthy or even ‘well-off’) had to bail out an industry regarded
by many as comprised of well-paid, privileged constituents.
Ironically, many of the bankers who took excessive risks were
the employees that were being paid the largest amounts,
and certainly, for bank employees, compensation often
increased in line with their level of risk-taking. This represents
a regressive and unfair approach to risk mitigation and it is
bound to increase inequality in society, lead to problems of
social cohesion and disrupt the very fabric of society. To this
extent, taxpayer-funded bailouts can be regarded as very
problematic for the financial system and civil justice.
We need an alternative way to govern risk
in the banking industry.
The problems associated with taxpayer-funded bank
bailouts are made clear by comparing such bailouts with the
features of insurance. The comparison has shown that such
bailouts are an inefficient and unfair way of dealing with the
consequences of financial risk. They are inefficient because
they represent an ineffective method of allocating liability for
covering the costs associated with the occurrence of risk, and
they are unfair because they represent a regressive, rather than
a progressive, method of risk mitigation. To this extent, such
bailouts should be avoided in the future and governments all
over the world should search for ways to help taxpayers recoup
the money expended on such bailouts, and ensure that the
risk of bank failures is mitigated in the most efficient and fair
manner possible.
/// Key messages for policy
-
Taxpayer-funded bank bailouts are not voluntary and
the decision to impose them lies with governments
faced with potentially devastating consequences for the
financial system arising from bank failures.
-
Bank bailouts as a way to resolve financial crises should
be avoided in future, because they unfairly transfer the
cost of a disaster onto those who had little role in it.
The present system means that those who must bear the
-
costs for the bailouts (i.e. the taxpayers), are unaware in
advance of the full extent of their potential liability.
- the aftermath of a taxpayer-funded bank bailout it is
In
important that governments find ways of recouping the
public funds spent on the bailout.
Dr Folarin Akinbami is a Lecturer in the
Department of Law at Durham University and a
legal researcher associated with the Tipping Points
project. Folarin is grateful for funding for Tipping
Points from the Leverhulme Trust. He would also
like to thank his colleagues on the Tipping Points
project at Durham University, particularly Professor
Roman Tomasic and Professor Ranald Michie.
/// References and Further Reading:
Akinbami F. ‘The Global Financial
Crisis: Causes, Effects and Issues to
Consider in the Reform of Financial
Regulation’ in MD McKenzie
and SK Kim (eds) International
Banking in the New Era: Post-Crisis
Challenges and Opportunities
(International Finance Review 11),
Bingley: Emerald Publishing
Akinbami F. ‘Is meta-regulation all
it’s cracked up to be? the case of
UK financial regulation’. Journal
of banking regulation, 14:16-32.
http://dro.dur.ac.uk/10250
Avgouleas E. ‘The Global Financial
Crisis, Behavioural Finance and
Financial Regulation: In Search
of a New Orthodoxy’, Journal of
Corporate Law Studies. 23-59
Coffee JC, ‘What Went Wrong?
An Inquiry into the Causes of the
2008 Financial Crisis’, Journal of
Corporate Law Studies. 1-22
National Audit Office (NAO),
Monitoring the Financial Stability of
UK Banks: Update on the Support
Schemes, HM Treasury HC 676
Session 2010-2011. http://www.
nao.org.uk/publications/1011/
support_for_banks.aspx
Cranston R. Principles of Banking
Law (Second edition), Oxford:
Oxford University Press
Jagger S. ‘Sub-prime and Banking
Crisis: Who Caused this Nightmare?
The Blame Spreads’, The Times.
Tomasic R. and Akinbami F ‘The
Role of Trust in Maintaining the
Resilience of Financial Markets’,
Journal of Corporate Law Studies.
11(2) 369-394.
Tomasic R. ‘Beyond ‘Light Touch’
Regulation of British Banks After
the Financial Crisis’ in MacNeil I.
and O’Brien J. (eds) The Future of
Financial Regulation, Oxford: Hart
Publishing. 103-122;
‘Restoring Trust in Order to Increa ͔)5