I think that the ring fence as proposed by the Independent Commission on Banking is a better way to achieve sensible and safe separation of functions within a bank while not causing great disruption to the overall financial system. Interestingly, the argument against narrow banking from the “big” equity school is that narrow banking exports all of the risk in the financial system to so-called shadow banks, thereby making them a danger to the system 4. Again, this amounts to an argument that unmanageable risk should be kept in banks which must therefore attract substantial equity funding. It’s not a winner I’m afraid. This brings me right back to the argument for what we are doing today, namely to strengthen the loss absorbency, risk management, governance, supervision and resolvability of the banks we do have. I do not accept the proposition that we can only abandon all hope of understanding the risks in banks. Likewise, I do not agree that large banks are unsupervisable and ungovernable. And, I do not concur with the view that large banks can never be resolved, thus leaving too big to fail always with us, and with the answer then to either require a lot of equity funding or to hope that the shadow banking system does not cause risks that threaten the whole system. Let me finish by focussing on resolution and supervision.
Practice and model diversity is a challenge, but not an obstacle for implementing efficient resolution strategies We have heard today that DGSs may still be very diverse in terms of their status, functions, design, size, etc. This is also the case for supervisory and resolution regimes even though the international standards-setters have made considerable progress in terms of harmonisation. Let me take the example of banking resolution: one of the (many) remaining challenges is to make sure that the adopted resolution strategies will be recognised and applied cross-border. Under the aegis of the FSB, several initiatives have been taken (e.g. ISDA protocol for financial contracts) but this is not the end of the story and many further discussions will be necessary to remove all the obstacles to implementing, inter alia, a single point of entry resolution of a GSIB. In the EU we have now a common legal resolution regime and even a common resolution authority for the Banking Union but resolution measures continue to be implemented at the national level because insolvency regimes within Europe are not unified. Being optimistic, I would say that these difficulties are not an impediment to resolution, because the most important thing is to be mindful of such a difficulty and to deal with it.