Bank of England turns more radical on bank terror
Central bankers’ speeches tend to be dry affairs. For this reason alone, Andrew Haldane’s latest thoughts on the financial crisis deserve attention. In a discussion about size in banking, the Bank of England’s executive director in charge of financial stability makes reference to the structure of al Qaeda, the limits of Facebook friendship, and the world domino-toppling record. Rhetorical flourishes aside, Haldane’s comments contain a serious message: regulators are thinking increasingly radical thoughts about tackling big banks.
Haldane is not in an academic ivory tower. If the Conservative opposition wins Britain’s general election, the Bank of England will become directly responsible for regulating the country’s lenders. Moreover, he has come up with some startling numbers. Using credit ratings to help quantify the implicit support that banks enjoy from the government, Haldane estimates that the UK’s largest lenders benefited from an average taxpayer subsidy of 55 billion pounds a year over the past three years. An alternative approach, looking at the relative funding costs of big and small banks, suggests the annual subsidy is worth 30 billion pounds.
The detail is less important than the size of these figures. None of the various bank taxes under discussion so far would come close: President Barack Obama’s proposed levy on bank liabilities, if applied to UK banks, would raise less than 4 billion pounds a year. Yet removing the implicit subsidy provided by taxpayers is perhaps the biggest challenge that regulators face.
So far, policymakers have concentrated on new rules to enable them to wind down even large, systemically important financial institutions. To some extent, banks are helping by drawing up “living wills”. If this succeeds, creditors will have to price in the possibility of banks being allowed to fail, and the implicit subsidy should disappear. Banks will face pressure from shareholders to justify their size. Some might even choose to break themselves up.
But if that approach doesn’t work, the other way to address the too-big-to-fail problem is to put explicit limits on banks’ size. Haldane is careful not to express a preference, stating that the debate about the future structure of the financial sector has only just started. But the challenge to Britain’s banks is clear. Having to stump up for a bank tax may not be the only consequence of their role in the financial crisis.