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Size does matter in banking

Ben Chu

Stephen Green is also, apparently, a defender of the unholy status quo when it comes to the structure of the banking industry, telling the British Bankers’ Association conference yesterday that calls for the break up of the banks are a red herring:

“In one sense all banks are too big to fail. You can’t put retail depositors into bankruptcy as you would a failing business. There is no correlation between size and failure.”

The Bank of England takes a very different view. In its Financial Stability Report last month the Bank stated:

“Policy action is needed to reduce the structural problems caused by banks that are too important to fail (TITF). Larger UK banks expanded much more rapidly than smaller institutions in the run-up to the crisis and have received disproportionate taxpayer support during this crisis. That reflected a misalignment of risks on TITF banks’ balance sheets, due to implicit guarantees on their liabilities.”

And here’s the evidence:

Untitled 2 Size does matter in banking

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  • IanStuart

    The “too big to fail” argument is a red herring. How is the BofE meant to stop large foreign banks creaming off large deposits given that they have an implicit guarantee from their home government. Does anyone believe that Chase or Citi will be allowed to fail? The problem is that anything less than 100 percent coverage of deposits leads to runs on banks and defeats the purpose of deposit insurance. Why should anyone expect depositors to exert market supervision of banks? Instead it would make more sense to take over failing banks and wipe out shareholder equity, then shareholders would have a real incentive to oversee banks. In addition, some revision to introduce greater liability for senior management of banks is essential. At a minimum bonuses based upon ficittious profits should be clawed back.

  • IanStuart

    The “too big to fail” argument is a red herring. How is the BofE meant to stop large foreign banks creaming off large deposits given that they have an implicit guarantee from their home government. Does anyone believe that Chase or Citi will be allowed to fail? The problem is that anything less than 100 percent coverage of deposits leads to runs on banks and defeats the purpose of deposit insurance. Why should anyone expect depositors to exert market supervision of banks? Instead it would make more sense to take over failing banks and wipe out shareholder equity, then shareholders would have a real incentive to oversee banks. In addition, some revision to introduce greater liability for senior management of banks is essential. At a minimum bonuses based upon ficittious profits should be clawed back.


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