Too Big To Fail

Decomposition of financial institutions during the recession empowered many big money players to accumulate capital. Thus mergers in the UK banking appeared which led to the formation of only few banking institutions powerful enough to control over 70% of the banking business in the country - HSBC, Lloyd's, Barclays, Royal Bank of Scotland and Santander. But by becoming way too large these institutions are endangering the whole financial stability in the UK - interconnectedness, capital availability and consumer numbers indicate that should any of these institutions fail to maintain financially stable banking conduct, the UK is facing another recession. And these banks are the ones too big to fail.

The Problem

By being too big to fail, such banks are given larger powers. Regulatory schemes are considered not to overburden the banks because thus the financial institutions would be more likely to commit or omit a potentially dangerous action. Thus the problem is clear - too much power is vested into just few banking players and the situation in the UK is determined by their sole decisions. As pointed out by the Independent Commission on Banking (http://s3-eu-west-1.amazonaws.com/htcdn/ICB-Interim-Report-Executive-Summary.pdf), banks have more leverage than regulators simply because a bank's failure would bring down a whole financial world.

This logically empowers banks to go unregulated when they undertake serious risks. For example, a huge bank in the UK decides to invest money in property but the market clearly indicates that such an investment would mean a substantial lost. Nevertheless the bank invests simply because it cannot be stopped and there is no regulation to prevent it from acting in such a manner. The bank then fails but since it is too big and too important, the government advances taxpayers' money to the institutions and it functions healthily again - simply because it is far too large to fail.

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