Why focus on the size of banks? Great Britain shows other ways to achieve financial reform.

Commentaries on economics and technology.
April 20 2011 7:06 AM

The Failure of "Too Big To Fail"

Why focus on the size of banks? Great Britain shows other ways to achieve financial reform.

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The major advantage of the scheme is that it dovetails with other reforms under development in Basel. A retail ring-fence makes most sense if coupled with new a new resolution regime, which would allow a retail subsidiary to be wound up without contagion across the group. If efforts to allow bondholders to share the pain are also successful, we might be within sight of a sensible and not-too-costly reform with which the market can make peace—and which regulators would have a realistic chance of managing.

Those who want the banks "cut down to size," even if it is a case of cutting off one's nose to spite one's face, are not happy with Vickers. But, by providing an honest, rigorous assessment of the major reform proposals, the commission has performed an invaluable service and deserves recognition for a job elegantly done.

This article comes from Project Syndicate.

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Howard Davies, former chairman of Britain's Financial Services Authority and former director of the London School of Economics, is the author of Banking on the Future: The Fall and Rise of Central Banking.