ECOBATE 2014 – 2. John Kay: Have Banking Lessons been Learned?

October 31, 2014

Prof Don Nutbeam, Vice-Chancellor of the University of Southampton introduced Prof John Kay whose talk was headed: 'Have Banking Lessons been Learned?'. He can also be seen on a video interview given to Information Daily at Winchester Ecobate 2014.

He wants structural changes to the banking and financial environment rather than more and more detailed regulations and rules of the type that were in place in 2007/8 when the crisis hit and which failed to stop it. He thinks that another crisis might have to be endured before we put in place what is needed. The total sum of financial derivatives is around £700trn which nonsensically is three times the value of the entire world assets. Only about 3% of the £7trn of all bank balance sheets is used for non-financial i.e. productive, real economy purposes. John Kay proposes that the activities of finance be separated out: a) utility/ useful / payments / and such boring activities; and b) the rest such as buying / selling and casino-like things. The former are serious and relationship based and the latter are buccaneering, speculative and transactional. He spoke of the high speed cable link between Chicago and New York built costing $300m which achieves an advantage in time of 0.7milliseconds to the traders who use it. Such business bears little connection to ordinary life. 

Historically stock exchanges came about when huge capital amounts were needed and savings were widely dispersed, in order to fund such as railways, automobile manufacture and brewery plants. Nowadays large capital amounts are not needed for start-ups. There is a need for finance to cover new business's losses, but when such as Facebook came to public offering and raised $16bn there was some perplexity as to what to do with the money!   The knowledge economy generates its own cash rapidly. 

He sees a particular mix of themes and players in current entrepreneurial activity. Basic research funded by governments, university involvement, previously successful businesses providing capital and local banks for local capital needs. Regulation should be used to help bring about the above - but not of a type with ever more detailed rules of the kind envisaged through Basel 1, 2, 3, etc.

Reported by Charles Bazlinton from the ECOBATE 2014 in Winchester, UK on 8 October 2014. Charles is the author of The Free Lunch blog.