Hazard Risk Resilience Magazine Volume 1 Issue 2 - Page 21

21 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