Why should we be concerned?
One of the key findings after the crisis was that oversized, overleveraged and overconnected financial institutions were too big to fail. When they got in trouble, governments and societies were obliged to bail them out. As public funds were used to save private businesses, the financial crisis turned into an economic crisis, a systemic problem. If we are to make the financial system safe for society, we need to get rid of such large, systemic institutions.
We called them too-big-to-fail, too-connected-to-fail, too-complex-to-manage or supervise, too-big-to-jail, and much more besides. They’re still here, are they too-powerful-to-shrink?
The Financial Stability Board (FSB) developed a methodology for identifying what they called the Global Systemically Important Banks (G-SIBs) and institutions. They undertook to publish a list each year. They classed them into 5 buckets, with Bucket 5 being the most systemically important (they impose slightly higher capital requirements the higher the bucket). Since 2013, the total number of G-SIBs based in the EU (i.e. not including the 2 Swiss G-SIBs) has only fallen from 13 to 11. Not much change, just a very small improvement when we look at the buckets: no more bucket 4, less Bucket 3 and more Bucket 1.
Source: Financial Stability Board
What should we change?
There are many recipes for tackling TBTF financial institutions: from nudging with incentives, separation of retail and investment banking, higher capital requirements or outright bans on institutions above a different size. Dreaming up clever legal structures to reduce the size of the bank is not the problem. Finding the political will and defeating the financial lobby machine is. You can find more detailed policy ideas elsewhere on the Finance Watch website and on the Change Finance website.