The end of too big to fail is fast approaching but there is more left to be done
I AM a supporter of free enterprise, yet I represent an industry that has been the biggest recipient of a state bail-out in British history. It is something that critics of banks have never ceased to remind me. “Tell me,” said an old colleague, “why the banks’ profits are privatised, but their losses are nationalised”.
Often I am confronted by the tangible anger of taxpayers that their hard-earned money was used to bail out banks. This anger is not only understandable, it is entirely justified. Money that could have been used to pay for teachers was instead used to prop up major financial institutions. We should never have been in the position that taxpayers had to bail out failed banks. But that was where we found ourselves.
Our main priority coming out of the crisis has to be ensuring that never again will taxpayers have to bail out banks. It is not just bad for taxpayers, but bad for banks. We have to solve the problem of banks being “too big to fail.”
Although it is rarely recognised in the world outside banking, a huge amount has already been done to address the problem. Banks are safer, with higher levels of capital and liquidity making them better able to withstand a crisis. Firewalls are being put in place, so that there is less economic contagion if a bank does fail. But the most important step is that banks are introducing recovery and resolution plans – or living wills – so that if they fail they can be resolved in an orderly manner.
We strongly support all these measures, but we have some concerns about how these reforms may operate in practice in the middle of a crisis. Our first concern is that governments must be prepared to resist political pressure and let banks die. They must resist the temptation to take a failing bank back into public ownership. We need a purely private sector regime, putting the losses of bank failures on the investors of banks, not on the taxpayer. That is why we disagree with those in the European Parliament who want legislation to enable governments to take failed banks back into public ownership.
Our second concern is a lack of co-ordination between legislators and regulators. If a major bank with operations in many countries fails, the different national supervisors need to coordinate their resolution of it. It is far less damaging to the economy if such banks are resolved as single entities, rather than each national regulator fighting to resolve the part of the bank operating under its jurisdiction.
We have certainly come a very long way since the crisis. Then the government really did have no realistic option but to bail out Northern Rock. Now, a Northern Rock equivalent would be far less likely to fail, and if it did there would be many options for resolving it, without bailing it out with taxpayers’ money.
But a large number of far-reaching reforms have been put in place – and still more are coming – to put an end to “too big to fail”. Only then can we be reasonably confident that never again will taxpayers have to bail out the banks.
Anthony Browne is chief executive of the British Bankers’ Association. This is an edited version of a speech made to the Institute of Directors.