Treasury Committee launches inquiry into "too big to fail" firms
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The Treasury Committee is to launch an inquiry into the ‘too important to fail’ dilemma in early 2010.
At the height of the financial crisis, governments authorised a massive injection of public funds to rescue ailing private financial institutions in order to prevent a collapse of the financial system.
The committe says there is general agreement of the need to minimise the risk of this re-occurring.
It believes for many commentators, the implicit assumption that governments will step in to support private financial institutions that are simply ‘too important to fail’ will drive excessive risk taking such as that which created the crisis.
The committee will be seeking evidence on the extent to which the structure of the current financial system should be reformed, and certain activities regulated, on the grounds of systemic risk.
It will seek evidence in particular on the extent to which banks operating in the UK are interconnected (eg in terms of inter-bank exposure, and risks to customers and, more generally, public confidence in the banking system).
* The relationship between size and risk, and business model (including mutual models) and risk.
* The pros and cons of a legal separation of low-risk banking activities such as the management of retail deposits from high-risk activities such as proprietary trading - often referred to as ‘narrow-banking’ options.
* The pros and cons of alternative methods of preventing financial institutions from being ‘too important to fail’ (eg minimum capital and liquidity requirements, ‘living wills’, taxation) and analysis of their likely effectiveness and feasibility including timescales for implementation.
* The challenges posed by cross-border financial institutions and of ways, including subsidiarisation as opposed to branches, of reducing systemic risk on a European or global scale.
* The extent to which individual nations, or regional groups, can or should act alone on the regulation of cross-border entities.
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