Banks 'too big and complex' to be managed, BOE warns

Banks and other financial institutions should have to justify their size to investors, a key Bank of England policy maker has urged.

Since the collapse of Lehman Brothers in 2008 and the bailout of the likes of Royal Bank of Scotland and Lloyds during the credit crisis, commentators have long mooted the idea some lenders are simply too big to fail.

But Michael Cohrs, part of the Bank's Financial Policy Committee, has said that investors in large institutions should suffer losses in the event of a collapse.

'For me the big issue facing the regulation of financial firms is the too big/too important to fail dilemma. If we really believed we could allow a big bank, investment bank, hedge fund, exchange which does central counterparty clearing, asset manager or insurance company to fail in a “controlled” way, the battle would be materially advanced.'

Cohrs continued: 'The owners of financial companies should put more pressure on management to explain the benefits of being global and being big – it is clear that under almost any set of parameters many large financial companies are both too big and complex to be managed and too big and complex to be resolved without a lot of broken glass.'

Under the current Vickers proposals, big banks such as JP Morgan and Barclays face having their investment and proprietary trading arms separated from their retail operations.

Last week lenders were told these plans could go further if they did not agree to ring-fence high and lower risk divisions, with Andy Haldane, the Bank of England's executive director for financial stability, urging for the threat of full separation to appear on the statute book as an incentive for lenders to comply.

Speaking to the Parliamentary Commission on Banking Standards he said: 'Legislation if the ring-fence proves permeable, that struck me as quite a clever way of implementing Vickers faithfully.'

His proposal was one of a number put forward to improve the UK's banking sector, and among these limiting the size of banks, which from next year the Bank of England will supervise alongside the Prudential Regulation Authority, was also suggested.