RegulationJan 16 2013

Too big to fail and too big to bail out

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      He argued that breaking up the banks would increase competition in the financial sector. Ensuring that no bank is “too big to fail” or “too big to bail (out)” makes it less likely that the taxpayer might have to pump funds into banks in the future to ensure the banking system continues to operate, reduce the effective subsidy given by the taxpayer to the banking system, and reduce the costs of banking services to customers.

      Mr Dolphin said: “After the events of the last five years, finance – and investment banking in particular – are held in very low esteem in the UK, but a modern economy cannot function without a healthy financial sector. For historical reasons, the UK has a larger financial sector than other similar economies and this can be a source of strength. But the financial industry is an asset that comes with associated costs.”

      He continued: “The challenge for policymakers and customers of the financial sector is to reduce these costs without damaging the asset. This will not be easy but many of the costs revolve around the sector’s ability to extract rents from the rest of the economy, so the best place to start is by attacking rent-seeking behaviour.”

      To this end the IPPR has suggested a number of steps should be taken beyond the splitting of retail and investment banking activities into separate organisations.

      Giles Williams, a financial sector partner for KPMG, said that having read the report, he has not found anything “hugely new” in it, and that many of the report’s key points and recommendations are already in the public domain.

      Mr Williams said: “If you look at the recommendations, most of those things at a high level in terms of sense of direction are to an extent already happening. When I read this I thought that it was interesting, but it didn’t strike me as being at the cutting edge of innovation.”

      Ken Cregan, head of digital banking for Capgemini Consulting, agreed. He said he found it to be an “interesting” report, but that a lot of it is a deeper play on areas that have already been flagged as concerns.

      Mr Williams said that although there is nothing at a European or government level about the splitting of banks, there are proposals for them to become separate legal entities – meaning that this area is already on the agenda.

      Mr Cregan said that the splitting of the banks would be a laudable thing to achieve, but that it would be complex.

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