The cost of making big banks safe

Bank of England

US and British regulators have agreed a common approach to limiting the damage for customers and taxpayers that is caused when a giant bank gets into difficulties.

The Bank of England and America's Federal Deposit Insurance Corporation have issued a joint paper which is in essence an action plan for making the biggest banks - such as the UK's Royal Bank of Scotland and Barclays, and Citigroup and JP Morgan in the US - safer.

At the heart of their plan is the idea that a single national regulator would take responsibility for overseeing the insolvency of a big international bank, a so-called GSIFI (don't ask) - which is an attempt to prevent a repetition of the uncertainty and confusion caused after Lehman collapsed in 2008.

The Bank of England and FDIC also want big banks to hold enough capital and debt that could be converted into capital at the apex of their complicated corporate structures, so that this capital and debt could absorb any losses that would be generated as the bank is resolved or made safe.

Other planks of their new approach would be to make sure that a bank's critical services continue to operate in a crisis, to endeavour to insulate foreign operations, to shrink the bits of the bank that caused the problems, and to sack culpable management.

One important consequence would be that in the next banking crisis, the Bank of England would not - in theory - have to call on the Treasury to put quite so much money into a Royal Bank of Scotland or an HBOS that was facing collapse, because the creditors of those banks would be forced to become shareholders.

If successful, this should limit the costs to taxpayers and the wider economy in the next banking crisis.

But if investors and creditors regard the proposals as credible, if banks are no longer considered too big to fail, the costs for banks of raising money would rise: as you will have deduced, the risks of investing in and lending to banks increases in proportion to the perceived reduction in the implicit insurance against failure they receive from the state.

What happens when banks find it more expensive to borrow or to issue equity capital? They have to make bigger returns to generate a profit. And, everything else being equal (as they say), that means they would feel obliged to charge their customers rather more for loans and for keeping money safe (cough).

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 327.

    The US and UK agreed to nothing. Most of the population are disgusted with the banks. The only people who agreed to anything and the politicians, most of whom are bribed by the banking Nazis to be proxy through which they can steal our money.

  • rate this

    Comment number 326.


    Banks MUST pay the going rate for the risky capital they need. That is how capitalism works. Ask yourself how much would you want from HSBC, RBS, Lloyds and Barclays to lend them your money, if the £85K guarantee did not exist?

    Central banks are destroying capitalism by QE and zero interest rates to banks.

    They must stop killing capitalism if we are to get a recovery.

  • rate this

    Comment number 325.


    The 'unthinkable' is the ONLY solution to the debt and asset price mountain.

    How many more decades of economic devastation have we to see before we can get out massively under employed labour resource working again. We cannot let generations of young be thrown on the scrapheap.

    Kill the banks NOW!

    PS most of this is at Mervyn King's door (and his fellow regulators)

  • rate this

    Comment number 324.

    The collective noun for bankers is 'a wunch'...

  • rate this

    Comment number 323.

    Still very few understand that what has happened is the end of Capitalism and the collapse of the self-balancing mechanism within capitalism that fixes the economy.

    This fact is absolutely critical to an eventual recovery.

    BANKS and the BANKING SYSTEM are BUST- throwing money at them cannot make it better.

    The ONLY solution is to allow capitalism's mechanisms of BANKRUPTCY to work through.

  • rate this

    Comment number 322.

    The answer rhobson897 is that those banks that received support through the special liquidity scheme have repaid that element of the bailout. What hasn't been repaid is the capital injection - ie the purchase of shares by the Treasury. So the Treasury exchanged one asset (cash) for another (shares) in RBS, LLoyds, Northern Rock, and BBS. The Treasury might(!) one day get dividends on these.

  • rate this

    Comment number 321.

    "If the taxpayer bailed out the banks. Why doesnt (or are the banks currently) paying back the taxpayer with any profit they are currently making?? On top of all the normal tax they are paying."

    They're all making losses because they are dumping the costs of the years of mayhem onto us (the owners and taxpayers). So corp. tax take is through the floor

    Their pay is shooting up though - hurrah!

  • rate this

    Comment number 320.

    "The current trade minister, Lord Green, was HSBC's chairman from 2006 to 2010, after serving as its chief executive between 2003 and 2006."

    making them safer to do what exactly???

  • rate this

    Comment number 319.

    So if a bank fails, it becomes a building society? There has to be some kind of bailout for banks because the whole business is a confidence trick. If more than about 10% of depositors (bank creditors) go to withdraw their money, the bank will fail and the rest will be left with the dots of those who took loans from the bank.

  • rate this

    Comment number 318.

    Answer = too much for the tax payer. Let them fail.

  • rate this

    Comment number 317.

    Guestimating the cumulative UK current BoT, into 2018, and its effect upon the economy, is one for Dougal. If Ermintrude will leave him alone and stop fermenting grass.

    A quote from Zébulon may be due, n'est pas?

    Let's never forget 'le chat bleu' or Cordon Negro Brut.

    Here's to the three twelves, coming to a place everywhere, tomorrow.

  • rate this

    Comment number 316.

    I dont fully understand this at all. But please answer me this.

    If the taxpayer bailed out the banks. Why doesnt (or are the banks currently) paying back the taxpayer with any profit they are currently making?? On top of all the normal tax they are paying.

  • rate this

    Comment number 315.

    312 314 ~ There were interesting balance sheet deficiencies to our financial sector which inflation will eventually sort out, but inflation is also a normal and principal function of monet's doctrine (monetary policy) hence the update to 2018 for austerity. To reach the example of 40% offered in Come ons theory, more is going on.

    What could moneterists have missed. Erm.. balance of payments!

  • rate this

    Comment number 314.

    312 Come On ~ Yours is a more complicated argument than is obvious, implying that 40% of wealth just upped and left. A good case for capital controls.

    It isn't the true story. Purchasing power has diminished but return on investment pace and exceed inflation unlike wages, pensions, savings and in fact anything to do with ordinary individuals wealth. Exports are doing well on the exchange rate.

  • rate this

    Comment number 313.

    311Further ~ So, lets consider the capital risk models. They are rubbish as exemplified by the oh so fishy Ratings Agencies which have grown out of the credit rating industries such as Experian.

    Now, let me tell you a story. Sitting comfortably?

    Once upon a time a stunning looking, well connected banqeur, developed a neat little theory that enabled dead horses to win the Grand National....

  • rate this

    Comment number 312.

    We still need to refer back our data before the 3008 crash To see what damage the banks did & monitor our UK recovery . Globally perhaps the Oz $ is a good yardstick to measure UK's net worth rather than just GDP. The uk's net worth is currently 60% lower than it was in 2008. Exchange rate currently standing at 1.53 against 2.48 in 2008. Thats how much money has gone out of the economy. Recovery?

  • rate this

    Comment number 311.

    Proper assignment of risk to shareholders, effective regulation and oversight and removal of state deposit guarantees, should significantly reduce risk premiums in banking and thetefore the cost of capital and its premium. Should, is the operative word.

    So what is going on?

    That would be incentives offered, without personal jeopardy, to employees by shareholders. It is all rather blech......

  • rate this

    Comment number 310.

    Reduce moral hazards! If a bank goes bust: commercial creditors (not ordinary depositors) lose their shirts, ditto shareholders, and senior staff should be conscripted into the army, work for army levels of pay, and be subjected to military discipline until they have cleared up the mess they created. Protect SMEs by banning the recall of loans and the cancellation of overdraft facilities.

  • rate this

    Comment number 309.

    What a difference four years makes ~

    Run by a former Drexel Burnham Lambert employee, AIG,'s Financial Products unit operated without oversight making derivative bets as a hedge fund attached to a large and stable insurance company.” It was one of several failures in Sept. 2008.

  • rate this

    Comment number 308.

    This will be absolute joy and pandemonium when it hits banking.....

    Five letter word, hanging about.


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