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An alternative approach to bank regulation

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A while back I wrote:

Banks are not, and cannot, be plc's in the same way that other companies are. The social value of a steelmaker can only fall as far down as zero, while the social value of a bank can be much, much lower than that.


Avinash Persaud at Vox EU proposes a solution:

The third pillar [of financial regulation reform] is requiring banks to pay an insurance premium to tax payers against the risk that the tax payer will be required to bail them out. If such a market could be created, it would not only incentivise good banking and push the focus of regulation away from process to outcomes, but it would provide an incentive for banks to be less systemic. Today, banks have an incentive to be more systemic as a bail out is then guaranteed. The right response to Citibank’s routine failure to anticipate its credit risks is not for it to keep on getting bigger so that it can remain too big to fail, but for it to whither away under rising insurance premiums paid to tax payers.

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