Big Banks Require Big Capital Buffers, Haldane, May Write in FT
The Basel-based Financial Stability Board is right to demand that big, complex banks hold larger capital buffers, said Andrew Haldane, the Bank of England’s financial stability director, and Robert May, a zoology professor at Oxford University and a former chief scientific adviser to the U.K. government.
Writing in the Financial Times, Haldane and May argue that scaling up risks in complex systems may cause them to cascade rather than cancel each other out, because size and complexity increase chances of cross-contamination.
History offers no evidence that big, complex banks are less likely to fail than smaller ones, but even if it did, there would still be a strong case for big banks holding higher levels of loss-absorbing capital, because of their system-wide impact, Haldane and May said.
Epidemiology teaches that the optimal strategy for preventing the spread of disease is to concentrate on “super- spreaders,” that is, not those most likely to die, but those with the greatest capacity to infect counterparties, they said.
Big, complex banks are the super-spreaders of the financial world, with “mind-boggling” numbers of counterparties; when Lehman Brothers Holdings Inc. collapsed it had more than 1 million such relationships, Haldane and May said.
To contact the reporter on this story: Alan Purkiss in London on apurkiss@bloomberg.net.
To contact the editor responsible for this story: Colin Keatinge at ckeatinge@bloomberg.net.
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