UK regulators seem unwilling to do much about banks being too big to fail

13th May 2014 by The Harried House Hunter

Today sees a speech by Sir Jon Cunliffe of the Bank of England on the subject of banks being too big to fail. For a man that many will not of heard of he has a lot of jobs and apparent influence.

Deputy Governor Financial Stability, Member of the Monetary Policy Committee, Member of the Financial Policy Committee and Member of the Prudential Regulatory Authority Board.

Mind you if you look at his track record he was exhibiting his influence in Whitehall at HM Treasury as a Managing Director of first Financial Regulation and then Macroeconomic policy until 2007 when he went to the Prime Minister’s Office. How did that work out? Did anything then happen in these areas? Apparently nothing untoward according to the British honours system as he was awarded a knighthood in December 2009 after the economy had plunged into a deep recession and the system of financial regulation had been exposed as a failure. I wonder what title he would have got if the policies had succeeded?

Also the appointment of a career civil servant and especially one from HM Treasury is of course yet another nail in the coffin lid for the concept of the Monetary Policy Committee being “independent”. Indeed the lid is full of such nails these days there can be little wood left, and it does question the purpose of it as it is reduced to being yet another expensive Quango.

Whilst we are on the subject of expensive Quangos what is the purpose of the Financial Policy Committee filled as it is by people who failed to spot the last property boom? They seem determined to look the other way this time around too as they chant the mantra of macro prudential policies. The same macro prudential polices which were abandoned in the past due to their lack of success! Perhaps they are hoping that the short attention spans of the modern era will at least mask that fact.

I have to confess that as soon as I hear about the appointment of Sir Jon Cunliffe he immediately became associated in my mind with Sir Frank Gordon from the Yes Prime Minister series.

The speech

The opening salvo could have been better chosen for a day when Chinese monthly industrial production growth was the lowest for 5 years and Estonia declared a year on year rate of economic growth of -1.9% whilst a survey on the German economy showed the worst result for over a year.

Advanced economies seem set on the path to recovery.

I do hope he was more tactful with countries like Estonia when he was our Permanent Representative to the European Union in 2012 and 2013! At least general agreement can be found for this bit.

It has been a long, hard slog to get to where we are

Although exactly which part has been a long hard slog for Sir Jon remains open to interpretation.

It did not take long for the excuses for inaction to emerge.

And the process of designing, agreeing and implementing that change is long and complex. I make no apology for this. The financial crisis was not a simple and short-lived episode. Nor can the response be simple or quick.

We do at least get a critique of Sir Jon’s past career although it is not put quite like that.

It is pretty obvious now that we went into the crisis with a high risk, highly interconnected banking system that had dangerously thin levels of capital and liquidity….the authorities also lacked the tools and the options to deal with failure once it occurred,

Where do we stand now?

Here is a confession of utter failure by the UK authorities on the subject of too big to fail.

In the UK, the largest six banks and building societies now account for 80% of the outstanding household and corporate lending, up from 65% at the start of 2008.

Sir Jon is quieter on the subject of his own involvement in this as for example the disastrous merger of Lloyds Bank with Bank of Scotland is described as a “hasty shotgun wedding”but we then move on with no reference to his own role in the Prime Minister’s Office back then. Perhaps that is why the bank bailouts are described as being “with little option”. Although the consequences of them are still with us.

Today, the government’s stake in RBS, equivalent to economic ownership of a little over 80% of the group, is worth around £31bn, a loss of over 25% on the funds injected.

Also there has been the impact on the wider economy.

The damage to economies generally from a financial system on long lasting life-support has been deep and wide. In the UK, five years later the economy is still smaller than before the crisis. Around half of a million more people remain out of work.

What can we do now?

The obvious solution is immediately rejected.

Others argue that regulation cannot hope to lower the probability of failure. With greater resources, the banks will always be one step ahead and find new ways to game the rules.

So if we are not allowed to make the banks smaller and if we are forced to employ well paid regulators like Sir Jon we of course need new regulations to keep them looking busy! We then get told we need to travel two roads.

I believe regulation can be effective in reducing the probability of failure.

With a zero-failure regime neither feasible nor desirable, reform is also underway to reduce the impact of failure as well as its probability…….The key is to be able to recapitalise a failed group safely, quickly and credibly by bailing in the group’s uninsured, unsecured creditors, such as debt-holders.

Apart from the conceptual flaws displayed here there are also operational and practical ones. Back in 2008 a rights issue of £12 billion by Royal Bank of Scotland was rightly perceived as enormous but in a few short months it was gone apparently without trace. So how far will this go?

It actually mandates that 8% of a bank’s liabilities must be bailed in before there can be any recourse to public money or industry financed resolution funds.

We do get a mention of something which apart from this blog gets very little mention the derivative contracts which banks entered into in the pre (and I fear post) credit crunch era.

Derivative contracts, in their current form, are a potential show-stopper here.

In many way this is quite a confession! But I fail to see how the solution proposed below will fix matters.

Drawing up a revised standard for derivative contracts is just the first step; the next and harder step is effecting a move of the hundreds of trillions of dollars of derivatives onto a revised set of contacts.

How exactly as we consider the image of a fish out of water?

Number crunching

After reading this my suggestion is that you advise your sons daughters, grandsons and granddaughters to become lawyers.

Nowhere was failure more disruptive than for the liquidation of Lehman Brothers….More than five years on, the liquidation is still not yet fully complete. Fees paid to the administrators have, so far, totaled more than $2bn.

It seems that jobs for life do still exist as that is the second category of them we have come across today.

Also there are troubling echoes of 2007 as we observe asset price inflation running rampant again. We have house price rises in the UK and today the FTSE 100 has done this. From the Wall Street Journal.

Bulls were back in Europe today as the FTSE 100 set its sights on its all time high of  6950.60, a level last reached in December 1999, after hitting its highest intraday level since January 2000 at 6877.39 earlier this morning.


There is much to consider here and the first is that some six years into the credit crunch our regulators are telling us that their response is still a work in progress! I am reminded of my post that regulation is doomed to failure and also of the fact that the Vickers Report does not fully apply until 2019, assuming it ever does. Is there anywhere else where such tardiness would be tolerated?

The problem with such can-kicking which some may prefer to see as well remunerated tyre-kicking is that there are plainly still problems with our banks. The retreat from investment banking by firms such as Barclays have many of the features of a rout and we keep getting nasty surprises from Royal Bank of Scotland and the Co-operative Bank. I do hope that there are no more collapses before our regulators are ready. Under the structure proposed I doubt that we will ever see this.

we will finally be able to say with confidence that no bank is too big to fail.



41 thoughts on “UK regulators seem unwilling to do much about banks being too big to fail”

  1. Anonymous says:

    Glass-Steagall was the answer from the 1930s depression. The banks are not only too big to fail, they are too well connected to be held accountable.

    1. dutch says:

      And Glass Steagall was repealed in 1999!!!!!Coincidence?

      As Delboy would say,pretentious?Moi?

      1. Forbin says:

        dutch , I think its more than just co-incideded

        In fact theres no reason to stop its re-enactment

        except TPTB like their money and are scared of loosing it

        It will never happen as with all scams follow the money and you’ll see who has it is running the show… its despicable!

        Apparently theres no media that will challenge the Top and no Democratic solution either as no party will rock the boat – it they bring it up they are open to the attack that they were complicit

        A controlled Bank collapse is needed with small despositors covered

        not gonna happen


      2. therrawbuzzin says:

        That line comes from Fawlty Towers.

        1. dutch says:

          Miss piggy apparently.You live and learn :-)

          1. therrawbuzzin says:

            Series 2 “The Psychiatrist” 1979.

  2. anteos says:

    interesting article Shaun.

    Its a no-win scenario really. afaik the banks are still deleveraging. And yet we have an economy who can only grown through debt. Which party would stop HPI and destroy the economy?

    1. Anonymous says:

      Hi Anteos

      We will continue to have problems until we face up to all the problems of the banking sector. But we have followed the route of mergers and can-kicking like virtually everyone else. It is like our ruling class are continually listening to Blur’s “There is no other way” on repeat. Whilst they do this there will be more “surprises”.

      The only possibility for change is after the next election as whoever wins it will want to kitchen-sink as many problems as possible.

  3. Forbin says:

    “Drawing up a revised standard for derivative contracts is just the first
    step; the next and harder step is effecting a move of the hundreds of
    trillions of dollars of derivatives onto a revised set of contacts.”

    Sound like an excuse to do nothing at all

    Everyday contracts expire and as they do you go onto the new variant , you can always take your business else where .

    Sounds like they havent even done the first step since 2008

    Ofcourse the whole idea was by 2018 everyone would have forgotten as the economy would have been in fit shape and motoring along ….

    Seems they miscalcualted , hence the short term fix of yet another housing boom …… with the bust to follow

    its not economics here but politics


    1. dutch says:


      One does wonder why retail banks need to be conducting derivative deals in the first place.

      I mean we managed before interest rate swaps/CDS became available.

      ‘ In 2008 when the world’s biggest banks stumbled toward insolvency,
      the U.S. Treasury stepped in to inject capital through the Troubled
      Asset Relief Program (TARP). TARP allowed the banks to offload or
      restructure their most toxic holdings, including many derivatives like
      interest rate swaps.
      Four years later no such relief has been mobilized for cities,
      counties, and public agencies suffering from the toxic interest rate
      swaps they have been forced to hold.’

      1. shrimpers says:

        Hi Dutch, lest we forget, GS was in a tail spin but Paulson, Geither etc etc are all ex GS…thats why they were paid out 100 cents on the dollar for worthless s**t byt he taxpayer…nuff said..

        1. dutch says:

          quite shrimpers.Not only GS but JPM etc as well.The investment banks were then allowed to take deposits as well iirc

          nothing short of scandalous.

          the shadow banking systems had all got too big and needed to wind their necks in.Now you’ve Chinese banks sat on loans that are collateralised on steel etc—which of course never goes up and dwon in price

    2. Anonymous says:

      > its not economics here but politics

      Which appears to be working as yesterday’s poll shows the Tories back in front. Brits *love* house price inflation. Which is why reality is busy reducing the amount of energy we get.

    3. Jim M. says:

      ” Macroeconomics isn’t a science (in the modern sense of the word, i.e. having to do with the observation of the physical world). It is often described as a “social science”, but that is a clumsy oxymoron. Though science can play a supporting role (e.g. cliometrics in history), the true object of study in economics is human behaviour, hence the inescapable reduction to moral

      The economy, as an object of study, is a human construct (or gestalt), both in the sense of the aggregate of decisions by individual “utility maximisers” and in the sense of a projected, quasi-religious belief. The urge to interpret it as a science, through mathematical models and “laws”, is an attempt to dehumanise and depoliticise it for hegemonic reasons.

      There is no economic “law” that cannot be proved or disproved at
      some time or place, so economics as a discipline fails the falsifiability test proposed by Karl Popper. However, that can also be twisted to suggest we can never know anything with assurance and should therefore cleave to the tried and tested (the reactionary recourse of Hayek, Oakeshott et al).

      Economics is politics. No more, no less.”

      I didn’t write that, but I rather wish I had.

    4. Anonymous says:

      Hi Forbin

      Just to say that in the world of Sir Humphrey and Sir Frank that “Sound like an excuse to do nothing at all” was described as masterly inaction and was a considered a compliment!

  4. Mike from Enfield says:

    Hi Shaun,
    It seems then that we have a man with a record as a recidivist failure who has no plan as he believes it’s all just too difficult. Not very inspiring is it?

    A naive question no doubt…but is there any sort of credible democratic mechanism to withdraw these snouts from the public trough? Or must we accept that everybody involved in this grubby area – so-called ‘regulation’ – can pretty much do (or not do) whatever they like?

    1. Jim M. says:

      We could, as a society, perhaps stop voting into power a political class who, whilst perhaps not being as bright as our fantastically clever top financial wizards, have got the whole sense of entitlement and reward of recidivist failure down to a tee.

      Silly, silly, naive old me, eh?

  5. dutch says:

    I find it amazing that you have to visit relatively unvisted corners of the web to find anyone asking the most basic question of our central bankers/regualtors.

    It appears,without exception seemingly,that none of their abject failings in so many respects,have been held up to scrutiny and that virtually none of them have suffered even the slightest hint of a dint in their career progression for said failings.

    As someone so succinctly put it,
    ‘the people we’ve got to sort this mess out(2008 finacial crisis) are all the ones that didn’t see it coming’

    So sad that our political class are either too dumb or too ‘owned’ to do the right thing.

    1. Forbin says:

      if Sir Merve the Swerve dodging off with millions pensions and gong did n’t tell us that then nothing will :-)


      Popcorn – fourtunatley Merve has not bought it all …. yet

      1. Jim M. says:


        Uncharacteristically wide of the mark there, old chap!

        Are you not well? 😉

  6. Forbin says:

    uh Shaun ,

    just incase we wonder were we are in the order of things I found this picture of the Banks and us


    The Banks are wearing grey btw , in case you’re wondering ( yes we’re yellow ) :-)


    1. Jim M. says:

      “But it’s so fluffy!?!”

      1. Anonymous says:

        Hi Guys

        Thanks for the cartoons which do rather sum things up. The Bank of England has just tweeted rather a hostage to fortune as you can see below..

  7. Anonymous says:

    It actually mandates that 8% of a bank’s liabilities must be bailed in
    before there can be any recourse to public money or industry financed
    resolution funds.

    As deposits are liabilities are we saying the next UK bank that goes under sees an 8% bail-in?

    1. dutch says:

      the 8% taking the hit would equity holders,bond holders,retained earnings getting wiped out etc.

      Deposit holders are last in the chain to get hit.

      Besides govt gurantees the first £80k,so most depositors would be left alone.

      1. Anonymous says:

        I see. 8% is pretty low then. Why can’t bond holders be completely wiped out before public money is used!

        1. Anonymous says:

          Hi Progrock

          That could be called the cry of the Irish after what took place across the Irish Sea…

        2. dutch says:

          great question prog

          that’s what capital ratios basel etc is all about.reducing the need for bail outs and bailing in the equity and bond holders instead.

          However,given the smash that’ll be inbound some time soon for UK estate agents,there’s still a reasonable chance we’ll get a Cypriot style haricut here.

          as to why RBS equity holders retained 13% of the mess that still is RBS,I have absolutely no idea.

          can anyon else enlighten us?

      2. Paul C says:

        Why don’t we just do that then. Reset the banks and debt mountain. Get the Government to print enough money to give out to depositors up to £80K. We could re-instate the local town bank manager salary for ALL bankers just as if it was 1963.

        1. Anonymous says:

          Because the claim on the debt gives the establishment control over the masses in one fell swoop.

      3. Eric says:

        It amazes me that many people see the Financial Services Compensation Scheme as the ultimate protection of their savings, when in practice it protects the banks from runs.

  8. shrimpers says:

    Hi Shaun, yes indeed Cunliffe is yet another amongst thousands of talentless jobsworths that are ruining this country in tandem with the manifest avarice of the elites – the undeserving rich.

    As for the frenzy of gorging lawyers involved with unravelling Lehmans, it is all reminiscent of the central case of Jarndyce vs Jarndyce in Dickens’ ‘Bleak House’ whereby when the case is eventually settled there is nothing left for the plaintiffs due to the fees of the vulturous legal profession

    1. Anonymous says:

      Hi Shrimpers

      Thank you for the Bleak House reference and yes there is much that is familiar today about the critique written then by Charles Dickens isn’t there? As to the jobsworths Dickens called his equivalent “Barnacles” if I remember correctly.

  9. Noo 2 Economics says:

    The banks should have been allowed to go under in 2008/2009, taken over by Govt, regulated (no lobby groups left to twist the politicos arms) recapitalised and sold back to private ownership at a profit to the Exchequer.

    The nature of the resale should have tried to arrive at a similar position to the US where I believe they have about 7000 banks. Part of the regulation should have banned any one bank from having more than a 5% market share and Investment banks being standalone entities – not internal departments of retail banks.

    End of too big too fail. Too late now they missed a once in a lifetime opportunity – I bet the big four are even bigger now (compared to GDP) than they were before the crisis.

    1. Anonymous says:

      You’re an optimist. We haven’t split retail banking from investment banking, we haven’t fixed the implicit bailout guarantee described as to big to fail. A pessimist might predict another bank implosion giving another chance to break them up.

      1. Noo 2 Economics says:

        If another bank implosion arrives than it will be a global economic implosion which I do not relish – I’m not always an optimist.

  10. therrawbuzzin says:

    I’d rather have a vasectomy than advise my offspring to become lawyers.
    The corrupt, festering Twin Towers of Westminster & City of London are, by far, my largest motivation for supporting Scottish Independence

    1. Anonymous says:

      Isn’t just London.

      Reykjavik, Dublin, New York ….

      Are the politicians and lawyers in Holyrood any different ?

  11. Paul C says:

    I noticed Lloyds bank advertising a 4% current account on TV yesterday. Finally one of the big four is standing side by side with Santander. It does rather confirm the TBTF and oligopolistic offer in a controlled market. Co-op is gone (not big enough to compete). Soon we can enjoy identical “personal treatment” as the monster banks merge social networking technology with monopsony practices. Apparently banks can now ask loan & mortgage applicants when and where they eat out, their hairdresser and gambling habits etc, not long before they do information sharing like the car insurers do, so that everyone expenditures are mapped to one another. Phase 2 is for the Government to access the information sharing network (for regulation purposes) and then taxation insight will be complete….

    I can’t wait….

  12. Eric says:

    Hi Shaun, Another great blog. It really is a sad and sorry story. I can’t believe the men in grey suits can be so tardy – maybe there are some powerful forces pushing the other way. OTOH maybe they are all on the same side. The side we call the 1%.

  13. realfinney says:

    The most important thing to remember when kicking tyres, is that if the wheels fall off as a result, people may expect you to fix it. The ginger tapping of UK banks delivered by Sir Jon suggests he’s familiar with the potential for work.

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