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BoE: more needs to be done to end ‘too big to fail’ banks



Banks could face further rounds of capital rising and restructuring to ensure that the financial system will not collapse in the event of another financial crisis, a Bank of England (BoE) executive has warned.

During a speech in London, Sir Jon Cunliffe, BoE’s deputy governor for financial stability, warned that the issue of banks being ‘too big to fail’ remained and additional requirements being introduced by the regulators were necessary.

He added that change within the financial system was needed “if both regulators and regulated are to re-establish society’s confidence that we have a dynamic and global financial sector, one that serves the real economy, without generating such painful booms and busts”.

Speaking about the 2008 financial crisis Cunliffe said it was “pretty obvious” that the UK went into the crisis with a “high risk, highly interconnected banking system that had dangerously thin levels of capital and liquidity” and that authorities lacked the tools to deal with failure.

He explained that putting all or part of large financial institutions into administration “proved impossible”, with the exception of Lehmans. This exception, Cunliffe added, “proved the rule that large, complex, systemic institutions were truly too big to fail”.

The aim of new regulation coming in is to recapitalise a failed group “safely, quickly and credibly” by bailing in the group’s uninsured, unsecured creditors, such as debt-holders. Through this, it is hoped that the “critical parts” of a failing group, those that contribute to the real economy and financial stability, would be able to continue operating.

However, this alone is not enough because bail-in powers need something to work with once a resolution is triggered, Cunliffe said.

“For resolution to be effective, we need banks to hold sufficient debt structured in a form that can be safely and quickly bailed in,” he explained.

The International Monetary Fund (IMF) recently stated that despite reforms, banks that are deemed ‘too big to fail’ are still taking bigger risks and that this has arguably intensified in the wake of the financial crisis.

Governments intervening to prevent the collapse of the financial system, along with banks growing bigger whilst the number of banks in operation fell, means that the estimated implicit subsidies to big banks rose significantly in 2009.

Photo: Rev Stan via flickr

Further reading:

IMF: banks ‘too important to fail’ are taking bigger risks

Banking systems remains risky and uncompetitive, research finds

Report: City of London’s position as EU financial services hub ‘uncertain’

Responsible investors call on bank of America to address climate risks

Bank of England to manage financial services security check


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