Future regulation of banks of Systemic Importance ?

swampgas

Recently the issue of certain banks being of systemic importance has been raised. For example AIB and BofI would be considered by many to be to important to let fail (i.e someone ends up bailing them out).

Should certain banks have an official "National Systemic Importance" designation? This could be applied by the regulator if the bank has (say) more than a certain share of the domestic market.

For example this could imply a higher degree of regulation to stricter standards, but would imply state guarantees in certain circumstances. Possibly such a bank would have to stick to "vanilla banking" and would be prohibited from engaging in the riskier types of business practice.

A bank without this designation would implicitly be allowed to be wound up if it became insolvent.

It's just an idea - no idea if it is practical or not. Personally I think it might be valuable for everyone - banks and state - to know in advance which banks can and will be let fail.

Does anyone know if such a system has been implemented elsewhere?

later12

swampgas wrote: »

For example AIB and BofI would be considered by many to be to important to let fail

Yes, too big to fail but the unfortunate issue is that they are also too big to save without putting the country in enormous fiscal danger. The latter is what has now happened. I would also add "too stupid to succeed", but that's probably just my own personal piss and vinegar opinion of AIB!

Should certain banks have an official "National Systemic Importance" designation? This could be applied by the regulator if the bank has (say) more than a certain share of the domestic market.

Not really, this has largely already been decided. AIB and BoI will swallow up the banks of lesser importance like pTSB - banking in Ireland is about to downsize in quite a major way. EBS will also disappear.

swampgas

later10 wrote: »

Yes, too big to fail but the unfortunate issue is that they are also too big to save without putting the country in enormous fiscal danger. The latter is what has now happened. I would also add "too stupid to succeed", but that's probably just my own personal piss and vinegar opinion of AIB!

Not really, this has largely already been decided. AIB and BoI will swallow up the banks of lesser importance like pTSB - banking in Ireland is about to downsize in quite a major way. EBS will also disappear.

But if a bank like (say) Anglo is not crucial to the day to day running of the country's businesses, why not let it fail? Or is it simply the fact that a bank can take other banks down with it that causes the problem?

I guess I'm trying to see how the banks can be separated by the regulator in such a way that the "too stupid to succeed" ones can fail without taking everyone else down with them.

For example, perhaps systemic banks should be restrained from certain types of inter-bank lending?

later12

swampgas wrote: »

But if a bank like (say) Anglo is not crucial to the day to day running of the country's businesses, why not let it fail? Or is it simply the fact that a bank can take other banks down with it that causes the problem?

If you simply let the bank crash and burn, it can take other banks down with it, yes. That is largely what happened in Iceland, who let their banks collapse, didn't honour bondholders, and look unlikely to renumerate foreign depositor claims - referendum pending.

However as we have seen in the Irish context, if you wrap the bank in flame retardant cotton wool, it can still take the industry down with it anyway.

The question of whether it was better to let Anglo burn or to have done what the Government did by nationalsing it and halfheartedly saving it, is now an academic exercise.
It is largely irrelevant since it will be wound down (sooner rather than later) and it did a hell of a lot of damage to the industry in any event.

The main issue is how you deal with bondholders and depositors in a wind down. If you leave them short changed, you generally damage your image and your economy. If you are in a position to honour their debentures, you should do so and will usually contain the panic.

Liam Byrne

Point 1 : Even if banks of "systemic importance" had been under some half-decent set of rules and regulation, no-one would have considered that Anglo qualified as such; few people had even heard of it until Lenihan started claiming it was "of systemic importance".

Point 2 : Horse - stable door - bolted.