Bankers are America's whipping boys du jour.

PHILADELPHIA - Boy, it almost doesn't pay to be a banker these days. Obviously, the massive bonuses the titans of the financial services industry continue to enjoy make up for a lot of the negative sentiment directed at them, but really, it's a stressful time and we should all keep them in our prayers.

Foremost in the troubled minds of bankers is the prospect of a round of new regulations, which might significantly alter today's sexed-up banking models and reduce profits (and thus, horror of horrors, bonuses). After years of exceptionally high returns on equity and impressive profits - excluding, of course, the last two years - bankers and bank shareholders may soon face structurally lower returns in a more conservative and constricted banking environment. However, very little is yet set in stone as alternative visions of reform vie for legitimacy.

Proposing new banking regulation is rather fashionable among politicians these days. Britain's Gordon Brown suggested implementing a Tobin tax (a tax on international trading); in his opening speech at the World Economic Forum's annual meeting in Davos, France's Nicolas Sarkozy plumped for the idea of pay caps for bankers and restrictions on the size of banks; and other politicians both large and small are bursting with suggestions, including, most importantly, US President Barack Obama.

In the United States, banks and bankers are currently slightly less popular than syphilis, and, unlike syphilis, they are the target of much political rhetoric. In his State of the Union address last week, Obama scored points for his increasingly challenged administration by ragging on the industry.

"Our most urgent task upon taking office was to shore up the same banks that helped cause this crisis.  It was not easy to do. And if there's one thing that has unified Democrats and Republicans, and everybody in between, it's that we all hated the bank bailout.  I hated it ... I hated it.  You hated it.  It was about as popular as a root canal," said Obama to raucous applause.

It's smart politics. Polls show that Americans, who are divided on almost every issue from healthcare reform to the war on terror, are virtually united in their resentment and condemnation of banks and the bank bailout, and Obama is not one to miss such an obvious opportunity for enhancing his connection with the public.

In his speech, having established that he and his team share Americans' sense of grievance, the president proposed some new regulations for the banks and a new bank tax. The constellation of reform that the Obama administration is proposing includes what's being called the Volcker Rule, a somewhat ominous-sounding name which refers to former Federal Reserve chairman Paul Volcker who suggested it.

The Volcker Rule basically would require that banks give up either their proprietary trading operations or their deposit-taking arms. Proprietary trading is what we call it when banks (or other financial services institutions) trade for their own accounts, instead of on behalf of clients. The reason that Volcker is keen to ban the practice is that he sees it as unfair. Essentially, banks take the deposits they receive from ordinary people, which in the US are protected by the Federal Deposit Insurance Corporation, and make bets with that money. If the bets come through, the bank pockets the proceeds and then gives its clients back their deposit money with the usual few cents of interest. 

Volcker objects to this because the money in question - everyday Americans' deposits - is federally guaranteed, so in a way, the banks can't lose (it's more complex than this, obviously, but that's the gist of it). His rule would ask that banks give up their prop trading desks, or stop taking deposits.

To be honest, this wouldn't be terrible news for most banks, at which prop trading is a pretty small portion of total revenue, but the idea of such restrictions has bankers' reaching for their oxygen masks. Their worst fear is that the US will return to the dreaded days of the Glass-Steagall Act, under which banks that took deposits were not permitted to engage in any investment banking operations. This is not even a possibility on the fringe of the horizon yet, but bankers are a little gun-shy after the trauma of recent years.

Banker anxiety aside, the real problem with the Volcker Rule, and with the Tobin tax, and with banking pay caps and a dozen other proposals is simple: they don't actually solve the problem. You see, the problem with the banking system, the reason that we're all so upset, is that governments cannot allow banks, which have in many cases evolved into enormous, complex mutants with dark, inexplicable powers, to fail.

Banks are too big, too important, and, especially, too interconnected to fail, and so all the risks that they take are underwritten by an implicit (and sometimes explicit) government guarantee. The problem is that the global financial system that has developed since the 1980s is more intertwined than the people who live in Melrose Place, and too sprawlingly complex for any agency to hope to regulate. Taking potshots at bankers' pay or the Goldman Sachs prop trading desk is rather like shooting at the porthole lights on an approaching battleship.

One reform that is likely to actually target the problem is requiring larger capital cushions. Banks have to keep a certain amount of liquid, physical cash and cash equivalents on hand to meet their daily cash needs. The amount they have to keep is usually calculated by mathematically minded people with a passion for the kind of long, probability equations involved, and often works out to about 10% of their total "risk", that is credit, operational and market risk (more formulae, I'm afraid).

New rules are intended to boost that percentage, and require banks to keep a lot more cash on hand for emergencies. It's hoped that this will reduce both the likelihood of bank defaults and the likelihood of a run on banks that are suspected of having no cash in the... bank.

But do these rules go far enough? Is more, and smarter, regulation what is needed? The debates will rage on, and there are no easy answers.

Write to Felicity Duncan: felicity@moneyweb.co.za or follow her on Twitter at http://twitter.com/FelicityDuncan

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The only individual worse than a Banker is an apologist for a banker. That would be really low. Its very reasonable to not support banks that trade for their own account and they must thrive or fail per their ability. Its also fair to limit the size of banks or other . .more institutions whose failure would result in a major economic shock to the economy of the country or globally. Its also fair to only allow banks and other institutions to trade in a country that are registered within a country. Its also fair that bankers who assume all risk and have no Government support should set their own bonus schemes. Its also fair to penalize those bankers who receive taxpayer bailouts yet still think they are entitled to a bonus. Regulations have become a necessity due to excessive risk taking behaviour and market failure. Regulations were removed or reduced at the behest of banker and free marker proponents. . .less by . on February 03 2010, 08:44 Find this comment inappropriate? Report it

thanks i must compliment you on how seriously improved your knowledge of financial markets is since you started on this site a few years back, and how you have let your humour and turn of phrase loose in your writing style. What started as "finance for . .more dummies" is now a seroius and insightful analysis. We hope you stck around! Now go ask Alec for that payrise... . .less by @felicity on February 03 2010, 09:11 Find this comment inappropriate? Report it

Come B&W picture is best. The syphilis mentioned did calm me down a bit. by Bwanker on February 03 2010, 09:32 Find this comment inappropriate? Report it

Bankers vs Farmers In 5 years time bankers will go to their work on a bicycle and farmers in a Maserati. by Troy Ounce on February 03 2010, 09:38 Find this comment inappropriate? Report it

no judgement You just don't get it, do you? by Paul Volcker on February 03 2010, 09:43 Find this comment inappropriate? Report it

Diagnosis Syphilis can be cured. by Dr Ben Spanker on February 03 2010, 09:57 Find this comment inappropriate? Report it

Thank our lucky stars South Africa has a solid foundation in its banking regulations. How long however before nationalisation and destruction. by Dave on February 03 2010, 10:37 Find this comment inappropriate? Report it

the problem is... ...the bigger the cusion of cash the banks have to hold, the harder they have to work to generate a return on "lazy capital" for shareholders and the more they will charge on loans.... by Observer on February 03 2010, 10:49 Find this comment inappropriate? Report it

Manipulation of statistics Feb. 3 (Bloomberg Multimedia) -- The U.S. may lose 824,000 jobs when the government releases its annual revision to employment data on Feb. 5, showing the labor market was in worse shape during the recession than known at the time. by Troy Ounce on February 03 2010, 12:17 Find this comment inappropriate? Report it

Inadequate understanding of capital adequacy Felicity, as an admiring fan of your articles, which are usualy well-informed and wry, please check out the difference between capital on the one hand, and liquid assets/cash on the other - they are targeted at different sides of the balance sheet . .more under different regulations. . .less by Gobsmacked on February 03 2010, 12:26 Find this comment inappropriate? Report it

Bankers They are part of the American cancer of greed etc and it's seems strangely to be an infective form of cancer. Completely new disease entity but it has spread far and wide. Chemotherapy and radiotherapy of the most toxic levels are needed to kill . .more them off and restore order . .less by Pie in the Sky on February 03 2010, 13:26 Find this comment inappropriate? Report it

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