What, if anything, can be done about banks that are too big to fail?
SUPERVISORS THE WORLD over are trying to work out ways of dealing with banks that are too big to fail. The most obvious solution is to chop them up into manageable bits so none is too big or interconnected to be allowed to go. But it is far from perfect. For a start, carving up big banks that operate internationally does not necessarily reduce their risk—on the contrary, their geographical spread may have made them safer. And Spain’s troubled savings banks show that when many small banks stumble they can cause as much trouble as one big one. The risks on their books are often concentrated.
However, reducing big banks to manageable proportions could be a question not just of size but also of the scope of activities. In the run-up to the crisis and right through it most big banks converged on some variant of universal banking, combining both retail and investment business. If anything, the shotgun marriages that took place at the height of the crisis accelerated this trend, joining many of America’s investment banks with their commercial rivals. This was done for good reasons. Universal banks generally have more stable earnings and lower borrowing costs than specialists in one or the other area of business. ...
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