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Make banks safer not smaller, says Barcap

Barclays Capital has argued against shrinking banks that have been deemed ‘too big to fail’.

In a report examining the largest European banks, Barcap says that bigger banks are more profitable and less vulnerable than smaller banks, suggesting the regulatory focus should be on making big banks safer rather than smaller.

It argues that banks should hold more liquid assets and capital as well as create plans for a “controlled failure” rather than be broken up and shrunk.

The report, by Barcap analysts Simon Samuels and Mike Harrison, says: “There was hardly a detectable size-related pattern to the banks that ‘failed’ in this crisis. Universal and narrow banks, large and small banks all ended up being rescued by either their governments or their competitors.”

The bank analysed performances of large and small European banks since 1980 and found that overall, larger banks appeared to have much lower return on assets, albeit again with much reduced volatility. It says the key to its argument is that on the occasions when banks do fall into loss it is the smallest banks that incur the biggest losses.

The report says: “So whilst it might instinctively suit politicians to argue for making banks smaller, it does not seem obvious that shrinking institutions will lead to a ‘better’ banking system for which to foster robust economic growth.”

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. they’re missing the point. this isn’t about making banks smaller. This is about reducing the cost on society when a bank fails. This can be done by either reducing leverage and increasing qualityand quality of capital or banks can become smaller. The outcome being sought is reduced costs of failure. The means by whic hthis is attained is either smaller banks or increased capital.

  2. “Make banks safer not smaller, says Barcap”. What they’re really saying is “leave us alone”.

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