Britain may need to cap the size of banks or fully separate their retail and investment operations to curb the risks “King Kong” lenders pose to the financial system, a senior Bank of England official said.
Andrew Haldane, the central bank’s director of financial stability, said tackling “too-big-to-fail” banking is essential to end the implicit funding subsidies big lenders receive from markets betting that no government will allow them to collapse.
From 2002 to 2007, the implied annual subsidy to the world’s biggest banks averaged $70 billion (£43.4bn) a year, roughly half of average post-tax profits, and this could balloon to around $300bn (£187bn), Haldane said.
“Subtracting this subsidy, removing the state crutch, would suggest a dramatically lower socially optimal banking scale. Like King Kong and Godzilla, these giants would arguably then be physiological impossibilities,” Haldane said.
Reforms like UK plans to hit the deposit arms of banks with extra capital requirements represent progress but “today’s ring-fence can become tomorrow’s string vest”, Haldane said. “Worse, they risk sending a false sense of crisis comfort.”
The Bank becomes the main regulator for UK banks in April. Haldane also sits on the Bank’s financial policy committee which sets the direction for regulation.