” If a bank has a balance sheet that’s bigger than an entire country’s GDP we cannot afford for it to go under. ”

Saying a bank has a bigger balance sheet than their home country’s GDP is just a way of emphasising that they are a big bank. There is no particular significance to passing that threshold. You may not mean it that way but it comes across as suggesting that a bank becomes TBTF when its balance sheet surpasses a GDP number.

” That’s why British taxpayers own most of RBS and a big chunk of Lloyds: we could not afford for them to go bust. ”

I am maybe being a pedant but I don’t like the term ‘own’ when it comes to shareholding. The British taxpayers own most of RBS shares, they do not own most of RBS. Shareholders are at the very bottom of a company capital structure. Consider if RBS went bust while the taxpayer owned most of the shares. Shareholders are last in line with a claim on the assets of the bust company and nearly always lose their entire investment. Those higher up the capital structure have senior claims on the assets. So who really owned the company?

I think the obsession with size is misleading when the real problem is interconnectedness and adequate capital. The Western country who sailed through the banking crisis with their banks unscathed was Canada. Moreover, they also sailed through the Great Depression with their banks unscathed when over five thousand went bust in the U.S.

The defining feature of the Canadian banking system is big banks. As well as being big they are uncompetitive and as a consequence highly profitable. Because they are uncompetitively profitable they did not need to engage in risky lending to generate a return. For example, the Basel I rules on credit risk set Tier 1 capital, equal to at least 8 percent of a banks risk-weighted assets. The Canadian regulator was stricter on the Canadian banks and imposed the rule at 10 percent. The more capital a bank must hold the less profitable it will be. Yet, Bank of Nova Scotia, Canada’s biggest bank before the banking crisis was making 18 percent return on capital. So the banking system was clearly uncompetitive. However, they have not suffered the impairments that hit the competitive banking systems. Over the last four years the Composite Commercial Banks Industry Index (STCBNK) that tracks Canadian banks rose 5 percent compared with a 56 percent decline for the KBW Bank Index (BKX)covering U.S. banks.

Therefore, if we want a safe banking system we do not want a competitive banking system. If we want a competitive banking system that is good for consumers, it will not be a safe banking system. The collapse of smallish banks will wreak as much damage as a big bank if they are interconnected through contagion. Lehman was not a big bank and was entirely an investment bank. The size of the bank balance sheet is not the key issue. Quality of capital and lending standards is what matters.

A bit surprising that you’ve not mentioned the bank levy in your little report. Given that the bank levy is the insurance premium that the big banks pay for their implicit guarantee and all.

I would have thought it would be worth mentioning. Especially as it is indeed an attempt to deal with the very problem you’re complaining about.

#2
The levy brings in around two billion a year, but lets round that up to three billion as it makes little odds difference when compared to the tens of billions given directly to banks each year. Still I guess it does not help to complain to much against the levy,it probably brings in hundreds of millions more in revenue than we’ve ever seen in year when compared to corporation tax paid by “our” banks.

I agree with Richard W. It is not the size of banks that is the issue, it is their interconnectedness and their importance to the system as a whole that matters. In focusing on the institutions and ignoring their connections we are actually failing to address the risk inherent in the way the system works – which is systemic risk, of course.

NEF is one among many people and organisations that seem to want to turn back the clock back to the 1950s, with lots of little banks all providing little local services to their little local areas and no international financial system at all. Wake up, guys. The world doesn’t work like that any more – in fact it didn’t really work like that even in the 1950s.

This age of megabanks and megacorporations must come to an end – massive corporate interests are profit-making machines that will always attempt to distort markets, cultures and politics to protect their advantage and advance their interests, whatever the cost to societies and nations. They must be cut down to a human size, and the invidious influence they have on our politicians and parliaments etc must be rooted out.

Divide banks up into bits that are small enough to fail. And don’t let them merge with or take over other banks and so become too big to fail again. What’s difficult about that, given the appropriate political will? But we must also take steps to ensure that no ministers are bought off with offers of lucrative directorships when their days of “serving the public interest” are over. That also requires that all meetings between ministers and lobbyists are minuted and posted in short order on the web.

@ 6 What’s difficult about is that it’s inefficient. I mean why not stop big supermarkets and go back to lots of little grocers, or big car manufacturers or big coffee chains ? It’s called economies of scale, reach a certain size and you can boss the market, set the price and sometimes the cost as well.
Injecting some competition into banking would be a good thing, and I think a lot of the public would but into a local smaller bank, the problem is that in order to start a new bank you need a huge amount of capital. Capital that you would have to borrow. From a bank.

There is one illuminating, perhaps compelling reason for breaking up Britain’s retail banks in this from the Office of Fair Tarding (OFT):

Retail banking is integral to the efficient functioning of the UK economy. However, when this sector is not competitive and is not operating to the benefit of consumers, it can generate substantial levels of consumer detriment.

For a number of years, the OFT has had concerns that the retail banking sector is not working well. OFT interventions in markets such as personal current accounts, small and medium sized enterprise banking and cash ISAs have found longstanding problems, such as high concentration, low transparency of fees, low levels of switching and high barriers to entry, which hamper effective competition in this sector.
http://www.oft.gov.uk/OFTwork/financial-and-professional/retail-banking/