Professor Charles Goodhart has warned MPs of the danger of international banks growing too large in comparison to the economy of their home country.
At a Treasury select committee session on Tuesday, Goodhart, from the London School of Economics, said policymakers had two main options available to them to limit the impact of international banking collapses.
He said: “The first answer is to try and get some kind of international agreement on burden sharing if you need to resolve a really large bank getting into difficulties. If you can’t do that, then there is a question which the Swiss and others have considered, that the Icelanders should have considered but did not, which was whether there should be a limit on the size of a bank if it becomes, in a sense, too big for the country to save it.”
He said: “Icelandic banks were far too big in relation to the Icelandic economy. The same is true of UBS and Switzerland. And you could argue that the same being true of RBS, and even HSBC, and the UK. Their overall liabilities are very large compared to our GDP.”
Professor John Kay, a visiting professor at the LSE, told MPs: “I think we have to go it alone and we have to go it alone in two ways. One is essentially if the British national institutions want to operate overseas, we make it clear we want to do that but we do not want, as the British taxpayer, to give any impression that we are underwriting these activities.
“Conversely, we do want banks from other countries to operate in the UK but if they do so they are going to have to maintain assets in the UK, which we could seize in the event of a failure.”