10 things governments should do to ensure banking and financial stability

A number of countries in Africa, Asia, the Middle East and Latin America have ‘come in from the cold’ in recent years as a result of a pent-up desire for political and societal renewal. A major issue for the new rulers running countries that are now much more open to the outside world is to consider how best to adapt banks and financial firms to systemic political change.

It is fair to say that putting banking and financial systems on to a new footing is probably not the first priority for governments wishing to prevent war and hardship, assure populations of basic necessities and improve the overall quality of life. On the other hand, it should not be too far down the ranking list either. Here are 10 precepts that governments in such countries would do well to emulate if they wish to ensure stability and widen perspectives in the financial as well as the political field.

1. Avoid the Anglo-American universal banking model, combining retail banking and securities activities. It is now under attack in Western Europe and North America and will probably be dismantled over the next few years.

2. In a similar way, do not allow banks and insurers to merge. Fundamentally, banking, securities and insurance are separate industries and should remain so.

3. Instead, introduce a system of specialist bank licences - some for retail banking, some for corporate banking and some for microfinance institutions. This has the advantage of simplicity and will be much easier to supervise. It should apply to domestic and foreign banks alike.

4. Do not permit a concentrated banking system, where perhaps a handful of giant banks dominate the market - as they do in many emerging economies. Competition is good!

5. Foster a mixed retail banking system - with many smaller privately-owned banks, mutual cooperatives/credit unions and a postal bank operating through the post office. Even small and medium-sized countries can aspire to have as many such community-based retail banks as possible. Economies of scale can be achieved in a different way given rapid advances in technology, the adoption of social networks and so on.

6. Require that bank executives need to be professionally qualified through approved and tested academic programmes.

7. Build a strong supervision system using best practice from many countries around the world.

8. Tackle potentially destabilising ‘cash mountains’ by introducing electronic payment card systems as soon as possible. In addition to internationally-accepted credit and debit cards, urgent priority should be given to the introduction of prepaid card systems. These should be 'open loop' - with cards that can be used to make payments on a general basis.

9. Do everything possible to prevent a repeat of the Czech voucher scam, where millions of people lost their savings in the wake of the collapse of the Iron Curtain.

10. Establish a Consumer Financial Education Council and encourage it to work with the media, schools and employers to improve consumers' understanding of financial matters.