Unfriending big banks

31 March 2010 By Peter Thal Larsen Follow @Peter_TL

The bank’s financial stability head says big UK lenders gain 50 bln pounds a year from being too big to fail and that they could become safer by studying the structure of al Qaeda. While provocative, his remarks suggest regulators are open to taking drastic action on bank size.

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Andrew Haldane, executive director of the Bank of England in charge of financial stability, believes UK banks enjoyed a 50 billion pound annual subsidy from being too big to fail between 2007 and 2009.

In a speech delivered on March 30, Haldane pointed out that credit ratings agencies give banks much higher ratings than they would merit on a standalone basis, because they enjoy implicit government support. On this basis, the UK's five largest banks enjoyed an estimated subsidy from taxpayers of 103 billion pounds in 2009, 52 billion pounds in 2008 and 9 billion pounds in 2007, Haldane said.

Haldane used al Qaeda as one of several examples of organisational structures that banks could study in order to make themselves more resistant to shocks.

"A series of decentralised cells, loosely bonded, make infiltration of the entire al Qaeda network extremely unlikely. If any one cell is incapacitated, the likelihood of this undermining the operations of other cells is severely reduced. That, of course, is precisely why al Qaeda has chosen this organisational form," he said.

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