Some banks have come out of the financial crisis in better shape than others. We should encourage them rather than lump them together with the failures.
Public anger at the recent failings of many of our leading banks, while justified, is not a sound basis for future policy. The temptation facing policy makers — that of failing to distinguish between better capitalized, better managed banks and under-capitalized, poorly managed banks — should be avoided.
The period leading up to the financial crisis was characterized by an insufficient differentiation of risk in the financial markets. Across many asset classes risk premia were compressed to such an extent that the difference in price between low-risk and high-risk assets was insufficiently wide.
Prices are signals and in the past few years they have signaled incorrectly.
Public policy that treats all banks as if they were the same perpetuates the problem of erroneous signaling: JP Morgan does not have the same problems as Citibank; Barclays’ prospects are not identical to those of RBS.