In the UK, for example, the banking sector had grown from around 100% of GDP to more than 500% of GDP in 2008. And the UK government had to inject 13 times more money into RBS than had been injected into Continental Illinois.6 Is too big to fail inevitable? The post-crisis period has seen a vast amount of work to come up with a better way to deal with a failed bank and a better answer than ‘the taxpayer’ to the question of ‘who pays?’ Some have argued that it cannot be done. The crisis, they argue, showed that large, complex banks do indeed have to keep operating. They are too interconnected and provide too large a share of essential services to the economy to be allowed to abruptly stop operating. This line of argument leads to the conclusion that if we want to end too big to fail, we need to end being big itself. We need to go back to a world of small, less complex banks. With the help of deposit insurance, these could be wound up quickly and simply without great disruption to the economy and society as a whole. A world of smaller, simple banks may appear tempting. But something important would I think be lost. As the Independent Commission on Banking argued in their Report, splitting up banks would reduce diversification benefits.7 While the cost of failure of small banks may be lower, these banks may hence be more likely to fail.
If an effective global resolution regime with clearly defined ex ante characteristics were to turn out to be a bridge too far, national authorities may have to fall back on a subsidiarization model, in which global firms would have to establish subsidiaries on a country-by-country basis each with their own capital and liquidity buffers. Such a regime would require greater capital and liquidity as the banks would lose the significant risk diversification benefits gained from operating in many different countries. Such a regime would also presumably make it more difficult for these firms to provide financial services seamlessly to multinational corporations, global asset managers, and others that operate on an international basis. Even in this scenario, however, it would be important to ensure that national resolution regimes could interact with each other in a coherent manner. To sum up, my view is that we live in a globalized world both with respect to the macro-economy and the financial system. But too often we set macroeconomic policy and regulatory policy at a national level, and miss important opportunities to coordinate and make the global economic and financial system stronger overall. We need to understand where greater global perspective is required and we need to apply that perspective consistently across jurisdictions in a timely manner. If we don’t do this, we won’t achieve all the benefits that are possible from global specialization and we will continue to run significant risks with respect to financial stability. Thank you for your kind attention. 4  BIS central bankers’ speeches