Limit the speculative use of derivatives, regulate securitisation, end manipulation and align individual incentives with social returns
Stop subsidising and secure the derivatives market
Much derivatives trading in banks would be economically unviable without the funding advantage that comes with being too-big-to-fail; in other words the market has grown over large due to an unintentional public subsidy.
Part of the solution is to tackle the size and structure of TBTF banks to reduce their funding subsidy. This would help the derivatives market to return to its natural size, big enough to serve society’s real hedging needs but no bigger.
Over-the-counter derivatives must also be made safer by being traded centrally on exchanges, like stocks and shares, as well as being centrally cleared as the G20 has proposed, so that regulators can see where dangerous exposures are building up. We would also like to see market-wide limits on the speculative use of commodity derivatives, to put an end to food speculation among other things.
It has been proposed that securitisation could be governed by an industry quality label. This is not enough: strict regulation is needed to keep securitisation from going off the rails again in future.
Financial benchmarks and commodity prices are de facto public goods, the way they are produced and used should be monitored closely by supervisors – who could need to intervene in the process.
Align pay incentives better with society’s needs
The remuneration of top executives and other financial workers needs revisiting to encourage more responsible behaviour, for example by linking pay to a firm’s ‘citizen dashboard’.