09/09/2013 09:38 BST | Updated 09/11/2013 05:12 GMT

Fixing the Banking System Means Putting Party Politics to One Side

You can be sure that most of my colleagues in the European Parliament do not embrace the concept of the free market. Day after day, I hear them speaking up for state intervention or attempting to regulate away risk. However, there is one area where there is a genuine coalition of interests and that is the need for banking reform.

Over the six years since the run on Northern Rock and the five years since Lehman Brothers collapsed, we've endured an onslaught of new financial regulations from Brussels, but we haven't solved the fundamental problem. If a bank went bust tomorrow it would still need taxpayers to bail it out. Those of us who believe in free and open markets think that companies that fail ought to be allowed to go bust to allow better-run rivals and new entrants to fill the gap in the market.

Brussels has spent the past five years introducing legislation that does not tackle the fundamental problem of banks needing bailouts when they fail. For several years, I have focused on calling for no taxpayer bailouts, greater director liability and sorting out international accounting standards.

Fortunately, other legislators are showing a willingness to tackle the issue of taxpayer bail outs. In a report on banking reform adopted by the European Parliament in early July, there was genuine agreement on the need for an overhaul of the banking sector. Most political groups agree that supervisors will need to spell out procedures to wind down failing banks without taxpayer funding and to create a scheme to allow customers of failed retail banks to continue to pay their bills or withdraw money from ATMs until ownership is resolved.

However, we have to be realistic and recognise that at some point, governments will be tempted to use taxpayers money. Therefore, we agreed to encourage banks to separate wholesale banking activities from retail activities in the event of failure so that the savings of retail savers are not used to subisidise the trading activities in the investment arms of banks. This so-called ringfence need not necessarily be structural but a clear distinction needs to be made.

In the same report, my call for measures to make directors more liable for failure, in particular exploring the feasibility of a return to the partnership model of ownership, received support from the most MEPs. Although there are concerns about how this would work in practice, the principles of director liability and the need for a better alignment between performance and reward are now firmly on the agenda.

Another priority has been raising awareness of the role of accounting standards in contributing to the 2008 financial crisis. In making the case for a review of the international standards in question, it has been important to highlight the apolitical nature of this issue. All political groups, regardless of party, are supporting calls for simpler standards that drive better governance and question why banks are able to book unrealised profits without making sufficient provision for potential losses.

In addition, it is vital that consumers understand how fractional reserve banking works. This means making consumers aware that when they open bank accounts, their money is not actually on deposit at the bank. I have consistently spoken in parliamentary debates on the need for banks to be much more transparent with consumers when they open accounts and to distinguish between genuine deposit accounts, current accounts where so-called savers are really lending their money to the bank, and investment accounts. In time, I hope to be able to gain support for such transparency.

As Members of the European Parliament from different countries and political parties, we often disagree on many of the big political issues. But in seeking to learn the lessons from the crisis, there is hope that we may be able to work across the political spectrum to produce a more robust, competitive and viable banking system.