Society is still paying for bank failures

Slim down mega-banks

Put an end to too-big-to-fail (TBTF) financial institutions

Recommendation 1:
Impose losses on private creditors when a bank fails

The costs of failing banks should be borne by those who profited, i.e. private investors, just the same as in any other businesses. "Bail-in" and other mechanisms that make bank investors bear their own losses would lead to them exerting more control over banks’ risky activities.

Recommendation 2:
Apply a limit to bank leverage

Leverage is the ability of banks to operate with borrowed money. A leverage ratio of 20 means that for 1 euro of own capital, the bank borrows 19. This boosts the profits (and losses) and determines how much of a ‘shock absorption buffer’ (=equity) a bank has if its loans and investments lose value. At a leverage ratio of 20, any losses worth more than 5% of its total assets would make the bank go bankrupt. In the financial crisis, many banks had insufficient capital for their losses and had to be rescued.

If banks had a bigger shock absorption buffer, they could withstand bigger losses before getting into trouble. And since banks are often highly inter-connected with other banks, having bigger shock absorbers would make the whole system stronger.

Recommendation 3:
Separate investment banking from deposit-taking banking

There is no fundamental reason to rescue an investment bank. In contrast, banks that provide credit money by extending loans and which also receive deposits and provide payment services have to be rescued – citizens rely on these services in their daily lives. Ensuring that the two are separate would allow governments to let investment banks fail without putting the whole economic system at risk. It would also stop the funding advantages that come with a public safety net from being used to subsidise financial trading.

What else needs to be solved?