Capping bank size won\’t work

A very good argument and one I cannot see a refutation of.

To Anglicise it.

We set maximum bank size at £100 billion. HBOS is at £99 billion. HBOS goes bust.

How do we rescue bust banks? We get someone else to take them over (no, we really do not like going through proper bankruptcy proceedings for banks).

So Lloyd\’s takes over HBOS. But the combination is now obviously over our £100 billion limit. So we must either not allow Lloyd\’s to take over HBOS or we must insist that a couple of years down hte line Lloyd\’s must sell it again.

In which case Lloyd\’s will refuse to take over HBOS in the first place.

So we cannot in fact limit bank size and also use mergers or takeovers to rescue bad banks.

8 thoughts on “Capping bank size won\’t work”

  1. Brian, follower of Deornoth

    O, but of course we can make exceptions for socially responsible banks, such as those that lend wisely in a manner which benefits the public, and those that make donations to the Labour Party.

  2. yes that is a good argument. I’m not sure it’s a knock-down against the desirability of having smaller banks. Other ways to rescue bust banks including having private investors recapitalise it, or have the govt. do it, then flog it to private investors later.

    The FT has some good reading on this… one from Rajan (a bit of a hero … see here, here and pdf). And Martin Wolf today.

  3. “So Lloyd’s takes over HBOS.”

    Or an non-banking institution does, which is perhaps an intended consequence of such a plan.

    An arbitrary limit on bank size is a bit potty though. It would act like a firebreak on bad management but also seriously restrain good management. All the regulators need to say is ‘There is no more ‘too big to fail’ ‘ and mean it.

  4. Gareth,

    I’m afraid that would be a non-credible threat

    arbitrary limits aren’t without their problems, but really it’s not obvious that it would stop “good bank managers” expanding their businesses. Scale of that order usually comes from directors merging businesses, and not often very successfully (sees RBS/ABN, Citi etc.)

  5. Surely the point of having small banks is that they won’t be rescued when they fail, so the merger scenario wouldn’t arise.

  6. Don’t agree that LLoyds would refuse to tak over HBOS just because it ould have to sell it a few years later. Buy, fix, sell is a perfectly normal way to make money for some people, and actually they would not buy unless they already had in mind their exit strategy

  7. I see two counters: one is that it’s still safer to have a cap and a failure at (for example) 100 billion instead of 1 trillion, and second, that there’s more than one solution to a big bank failure: for example, instead of one bank taking over the failed one, two or three can, as with ABN Amro (I know, not a good example for many reasons). The main problem, I think is that “too big to fail” is misleading shorthand for “failure too dangerous to be allowed”, which can be the result of size (maybe) or complexity, or counterparties at risk or probably a bunch of other things, and certainly aren’t limited to banks: see, for example, LTCM and GM. The solutions being proposed go to the slogan, not the more complex underlying problem(s).

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