–BOE Haldane: Some GDP Loss Due Credit Crunch Likely to Persist
–BOE Haldane: Clear Banks Can’t Pay for Financial Crisis Cost

LONDON (MNI) – Some of the loss of output arising from the credit
crunch is expected to persist, and the cost of the financial crisis is
so large it will be impossible for the financial sector to pay for the
damage caused, Bank of England’s Executive Director Financial
Stability Andrew Haldane said Tuesday.

The senior BOE official looked at the issue of “too big to fail”
and said that, in light of the credit crunch, there were clear,
theoretical reasons for limiting the size of banks.

In his speech, Haldane summarised some of the academic literature
on public goods, risk, diversification and diversity. He ended up
suggesting that restricting the size of banking groups to, say, USD100
billion might be a more optimal solution to the present situation, with
states implicitly or explicitly supporting an array of very large banks.

“The costs of past financial crises appear to be large and
long-lived, often in excess of 10% of pre-crisis GDP,” Haldane said.

“World output in 2009 is expected to have been around 6.5% lower
than its counterfactual path in the absence of crisis. In the UK, the
equivalent output loss is around 10%. In money terms, that translates
into output losses of $4 trillion and stg140 billion respectively,”
Haldane said.

He warned that some of this lost output may not be recouped.

“Some of these GDP losses are expected to persist. Evidence from
past crises suggests that crisis-induced output losses are permanent, o
at least persistent, in their impact on the level of output if not its
growth rate. If GDP losses are permanent, the present value cost of
crisis will exceed significantly today’s cost,” he said.

Haldane argued banks should be thought of as “polluters”, polluting
economies by creating the risk of systemic financial crisis.

He looked at two possible solutions; a systemic tax on banks or a
prohibition on their activities and/or size.

Haldane rejected the arguments against prohibitions on size and
said smaller, modular banks may result in less risk of systemic failure.

“The maximum efficient scale of banking could be relatively modest.
Perhaps it lies below $100 billion. Experience suggests there is at
least a possibility of diseconomies of scale lying in wait beyond that
point,” he said.

That would entail a radical shake up for global banking. Haldane
said that in 2008, 145 banks globally had assets above $100 billion,
most of them universal banks combining multiple business activities.

His comments put him at odds with the current UK government.
Chancellor of the Exchequer Alistair Darling has repeatedly rejected
ideas that the largest banks need to be shrunk and has pointed to the
problems faced by smaller banks, such as Northern Rock, during the
credit crisis.

–London newsroom 0044 20 7634 1655; email: drobinson@marketnews.com

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