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Too Big to Fail?

Governments around the world spent hundreds of billions of pounds bailing out stricken banks during the financial crisis. Still, today the UK Government owns over 80% of RBS, who was prevented from collapse, because it was branded "too big to fail". However, new global rules have been created by the Financial Stability Board (FSB), a global monitoring body,  to prevent banks from being bailed out by taxpayers.

Mark Carney, FSB chairman and governor of the Bank of England, said it had been "totally unfair" for taxpayers to bail out banks after the financial crisis. He went on to say that "the banks and their shareholders and their creditors got the benefit when things went well but when they went wrong the British public and subsequent generations picked up the bill - and that's going to end".

The proposed new rules, which are up for consultation and should take effect in 2019, require "global systemically important banks" to hold a minimum amount of cash to ensure they will be able to survive big losses without turning to governments for help.

The FSB has published a list of 30 banks it regards as "systemically important", meaning their collapse could have a wider impact on global financial systems. In the UK, the banks are Barclays, Standard Chartered, HSBC and the Royal Bank of Scotland. Lloyds Banking Group has been removed from the list as its potential impact on financial systems has declined in recent years.

We understand that the new system would ensure that bank shareholders, and lenders to banks such as bondholders, would become first in line to bear the brunt of future losses if banks could not pay out of their own resources. The rules created would require big banks to hold much more money against losses.

Given the borrower casualties of the legacy debt problem, GDP Partnership welcome the concept of these new rules and will watch this space with interest. So that we all learn from the mistakes of the past, it would be far better to change the rules of finance to ensure that any bank could safely "fail", if it gets into serious difficulty, no matter how big it is.

Darwin AllenComment