UK banks are too big

June 18, 2009

Peter Thal Larsen picks up on a potentially-explosive quote from Bank of England governor Mervyn King last night: that “if some banks are thought to be too big to fail, then, in the words of a distinguished American economist, they are too big”. King, of course, is the UK’s top bank regulator, which means that some of the biggest banks in the world ought to be feeling rather worried right now: too-big-to-fail banks dominate the UK banking system.

King does in his subsequent thoughts back off a little from the implication that TBTF banks should simply be chopped up into small-enough-to-fail pieces. Instead, he seems to think that something along the lines of Glass-Steagall might be in order:

It is not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure.

I think this doesn’t go far enough: both high street retail banks and risky investment banks can be TBTF, and blowups can happen in retail banks as well as investment banks. Just look at Northern Rock.

My bright idea is a simple cap on the size of any bank’s balance sheet: I’ve proposed $300 billion in the US, and the number would presumably be smaller in the UK. That’s a lot easier than trying to create highly-complex capital adequacy standards which fluctuate according to perceived systemic risk. And a lot harder to game.


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