Moral hazard is about behaviours not structures…

If you can get it, John Kay’s column in today’s FT is worth a peruse. Not least since he’s sounding a warning whistle that beefing up regulation is not the way to smarten the market or protect tax payers interests.

In particular he sounds a note that will be familiar to those of us who witnessed the Irish government’s gung ho short cut to shoring up its banking sector:

“It is sometimes tempting to think that guarantees that are not called upon do not cost anything, although this mistake is not one that banks themselves make. Guarantees, implicit or explicit, mostly do not cost anything. But when they do cost something, what they cost is usually a lot. The implicit guarantors of Fannie Mae and AIG – US taxpayers – have discovered that. Irish – and German – taxpayers are beginning to learn the same lesson. ”

The answer? Well according to Kay:

…insist that domestic depositors’ funds are ring-fenced and that government does not underwrite the wholesale market obligations of banks located within its borders.

That might lead banks to shop around in search of accommodating jurisdictions willing to underwrite their global activities. Such banks would be the corporate equivalent of the benefit scrounger posing as asylum seeker, and are likely to receive the welcome that such migrants receive as individuals.

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