My column in the FT this week is on how to prepare for the next financial crisis:
Of all the suggestions since the financial crisis erupted to rein in banks and curb their incentives to become too big to be allowed to fail, the most cunning is the “living will”.
My view, however, is that enforcing wills could be both a sound discipline and help with the “too big to fail” problem by reducing the advantages of being big. If banks do not like it, they have to come up with another way to reassure British (and other) taxpayers that they will not be a burden again.
“Living will” is a misnomer, since the term means a plan drawn up by a bank for how it can be broken up if it is insolvent. It would be simpler and more accurate to use the term “will”, as Mervyn King, governor of the Bank of England, did when he coined the phrase in a speech in June.
“Making a will should be as much a part of good housekeeping for banks as it is for the rest of us,” said Mr King. Since then, that notion has been endorsed by Lord Turner, chairman of the Financial Services Authority, and Alistair Darling, the UK chancellor of the exchequer.
Put like that, it is uncontroversial. No one wants a repeat of last year’s scramble by governments to prop up all the operations of international banks such as Lehman Brothers and Fortis. The mess of assets and liabilities in different countries, not to mention a tangled web of derivative contracts, caused chaos.
Yet it is provoking resistance among some British banks. “If they [the regulators] want to turn the clock back and return to a world of national markets and small, simple banks unable to support global growth, they are going the right way about it,” says one banker.
They object to Lord Turner’s belief in wills as a means of forcing banks to simplify international activities and curb tax avoidance. Some fear they will be forced to set up ring-fenced subsidiaries in each country to make things simpler for regulators and governments.
You can read the rest here and comment below.
