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Finance session fellows compete in fierce debate

In the balmy surroundings of the Robison Gallery, on the top floor of Schloss Leopoldskron, looking out the wide-open windows across to the Festung Hohensalzburg, 38 central and private bankers, regulators, financial experts, academics and journalists gathered on a Friday night to debate the motion: “The surest solution to ‘too big to fail’ is to break up the banks”.

Chaired by Secretary General, International Organization of Securities Commissions, David Wright, and held as part of the program of the session ‘Financial Regulation: Bridging Global Differences’, the two teams* gave their for and opposing arguments before the debate was opened to the floor and eventually a vote was taken.  Despite the late night fixture and the warm venue, the debate was lively and fierce as participants hankered for the microphone to make their case.

Below are some of the quotes presented in the main cases for and against the motion.  

*Please note that as the debate was held under Chatham House Rules, no names of team members or audience speakers will be published. All participants were speaking in a personal capacity and do not represent the views of their respective organizations.

For
“If banks are to live in the market, they need to be able to die in the market.”

“Capitalism needs to apply to the banks, just like it does to their customers.”

“We need to introduce resolution reform that will make banks safe to fail.”

“If you make banks too small to save, it will be the surest solution to ‘too big to fail’.”

Banks can be broken up in ways that are not defined by size. “What is the line between big [banks] and small [banks]?”

Separating banks along commercial and investment lines “doesn’t necessarily save against ‘too big to fail’... Banks need to be smaller, not just simpler.”

Banks would be safer if they were made to give up their foreign activities.“Big banks are a luxury that countries cannot afford.”

“Banks need to adopt a Hippocratic-like oath of ‘do no harm’... ‘Heal thyself or we’ll do it for you!’”

“Do you really want to work in a system where you have these monsters with access to unlimited amounts of money?”

Always having the option of being bailed out by public money will not force banks to act more responsibly.“Can banks be made safe to fail?... Is there any other choice but to make them smaller?”

“Banks are becoming so big that they can’t even manage themselves and are now beyond anyone’s control.”

Banks should be broken up along lines according to the size of the GDP of the country in which their headquarters are based. “Put the method of division up to the banks’ own boards; they can decide how they want to divide. But they must divide.”

“Banks aren’t too big to fail – now they’re too big to save!”

Banks vis-à-vis other businesses isn’t like a big car versus a small car; it’s a jumbo jet versus a small car. If either crashed on the highway the jumbo jet/bank would take out a lot more people with it than would a small car. We have to consider bank failures in the wider market context.

Against
“Society wants predictability... and society feels let down when things don’t turn out how it expects it to be... We don’t want to put public money at risk again... but does smaller really mean safer? ... Is there evidence that size is a deciding factor? This wasn’t the case for Dunfermline [Building Society] or Northern Rock... Big banks can absorb big losses more easily, such as JPMorgan [Chase].”

“Is it easier to deal with five to six large banks or 50 to 100 small banks?”

“Wouldn’t ending ‘too big to fail’ make these past six years seem like a waste of time?”

“What do you do with the big banks that are behaving well? ...Forcing banks to split up could be a seizure that would get you in trouble with human rights!”

“Our task is to stop these guys running into complexity they can’t manage, not just split them up.”

How would you break them up? Size? Size according to GDP? Business or foreign lines?

“It could cause another crisis by encouraging a break up as it could cause a lack of confidence in the market... Psychology plays an important role in a crisis... If no one trusts anyone, how can we get over that?”

“It’s not a free market anymore if you tell banks to break up!”

“If there are banks that have been deemed systemically important [29 banks have been given the status of "global systemically important financial institutions" or "global SIFI"] then they will get bigger because they will inevitably attract more capital because they are deemed more safe.”

“No bank should ever be too small to save... Would we really rather tell people they have lost all their savings?”

“If you decide banks should be made smaller in countries with a smaller GDP, banks will simply move their headquarters to countries with a larger GDP – looking for a ‘bigger uncle’.”

“If we break up the banks, we go back 30 years – is that really what we want?”

“We need to end the fallacy of never using taxpayers’ money again... If there are failures in the banking system, society still pays... We have to avoid failure, not find new, clever ways of funding it.”

Large global banks like HSBC that operate on a subsidiary basis have avoided failure and remained “safe because of diversification”. HSBC has not received any government bailout money.

“Every institution has the right to fail.”

Result
For: 11 votes
Against: 26 votes

The nays have it. The motion falls.