There is often a discussion that banks are too big to fail or too big to jail. And lots of evidence that both of these simple expressions are true as we see many banks that should fail but are bailed out by their governments to avoid the damage to the real economy from their failure. Or banks that have obviously crossed legal boundaries but receive neither institutional or personal consequences as the risk of jail or criminal conviction would also lead to consequences for banking licenses that would negatively impact the real economy. But I have often thought there is a third expression too little used: Too big to sail.
A new book by Christian Dinesen, Absent Management in Banking would seem to provide strong historic evidence of this expression. I have only had a chance to read a review of it in the Financial Times but from that review a few key remarks can be extracted. As noted in the review, Dinesen concludes that in recent years for banks “growth was unmanageable.” The review also traces some of the recent problems to a combination of “the introduction of morally hazardous limited liability through the retreat from partnership together with the liberalisation of markets” which I believe is a solid analysis. This combination has proven very problematic whereas one or the other of the changes might have been much less damaging.
In conclusion the review notes Dinesen’s view that the regulatory approach did not “simplify (the banks) to make them more manageable.” Along with the reviewer, I believe this “analysis bears thinking about, though many will find the prescription uncomfortably radical.” Time to order the book and get even more insight for how the banking system should be restructured to meet the needs of society.
