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Folarin Akinbami argues that government rescues
of banks should be avoided to mitigate financial risk
The global economy is still recovering from the
devastating global financial crisis of 2007-2009. The global
financial crisis was caused, in large part, by excessive risktaking by banks and other financial institutions, and by the
eventual bursting of asset price bubbles in housing markets
in many western countries such as the UK and the US. The
global financial crisis saw the near-collapse of several banks
and the subsequent need for governments to use taxpayers’
funds to rescue such banks. 1 The financial rescue packages
for the troubled banks are popularly referred to as ‘bank
bailouts’. However, bank rescues need not be funded by the
government, and sometimes they are funded by the banking
industry itself. Examples include some of the bank rescues
under the so-called ‘lifeboat’ during the secondary banking
crisis of 1973-1975.2 On this occasion the magnitude of
the financial problems faced by the troubled banks meant
that their fellow banks were either unable or unwilling to
come up with the funds necessary to rescue them. The costs
of these bank rescues are substantial; for example the UK’s
National Audit Office (NAO) reported in 2010 that the scale
of financial support provided to the UK banks was £512
billion.3
The bank bailouts that resulted from the global financial
crisis have been subjected to criticism on several fronts.
For example, economists argue that bailouts encourage
moral hazard, while social commentators (social justice
advocates) have complained about the inequity of the
bailouts, and argue that it resulted in an unfair transfer
of wealth from the less affluent to the more affluent in
society. Both sets of criticisms are, arguably, very strong.
But another perspective is needed, in this case a ‘risk
mitigation’ perspective. Risk mitigation refers to the ways of
dealing with or managing risk, that is, the way in which risk
is assessed, measured, prevented or managed.
The risk mitigation critique here is not a critique of the
failures of the banks’ risk assessment models or their risk
management techniques.1 Rather, it is a broader critique of
how individuals and society as a whole approach risk, and
the ways in which we deal with (mitigate) risk of damage
when a banking crisis occurs. For this critique it is helpful
to draw upon a well-known risk mitigation device that is
prevalent in society today – insurance. Insurance is not
necessarily the only risk mitigation technique one might
compare with bailouts, but is useful for considering key
feat