3 thoughts on “Plan to ring-fence banks misguided”

  1. Posted 06/02/2013 at 13:25 | Permalink

    Dr Wellings makes many valid points. I had also misunderstood the arguments for ringfencing until I read the original recommendations in more detail. Their point was that it is impossible to “tackle moral hazard head on” as Dr Welling suggests unless the non-deposit elements of a bank can and will realistically be put through insolvency. However, no democratic government will ever choose to inflict losses on all depositors (voters) in a crisis, and will change laws as necessary to make that possible. Suggesting the removal of deposit insurance is an illusory solution because it will be reinstated in a crisis.

    The argument is not that investment banking is inherently more risky – it is that it is possible to put it (and a bond-issuing holding company) through restructuring, whereas haircuts cannot realistically be imposed upon small depositors in a democracy.

    The only way to protect the taxpayer and truly eliminate moral hazard is to require a structure that realistically ensures that haircuts can be imposed on bond and equity holders in a bank without disrupting the entire economy.

  2. Posted 06/02/2013 at 16:14 | Permalink

    @John Myers – While my preference would be for deposit insurance to be phased out completely, it would be possible to limit it to say 90 per cent of the value, which would be more politically acceptable in a crisis and would still improve the incentives facing both depositors and banks.

  3. Posted 07/02/2013 at 09:47 | Permalink

    Alternatively the government could charge for deposit insurance (commercially, i.e. costing more depending on the financial state of the deposit bank, term of deposit etc). The charge would be collected by the deposit bank – a customer at a risky bank could end up receiving negative interest.

    They should then create a market for private firms to insure deposits, with the aim of exiting the market…

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