Parliamentary Commission on Banking Standards ponders TBTF.

I like the opening remarks at this hearing of the above commission.

Andrew Tyrie (chair) asks Mervyn King whether he agrees that “the elephant in the room is that banks are still too big to fail? Have you now got the tools that you need to deal with that?”

Mervyn King replies: “If I were to say what the objective is over the next five to 10 years for the Prudential Regulation Authority, it would be to ensure that, at the end of that period, we have genuinely solved the "too big to fail" problem.”

10 years eh? No great sense of urgency then.

I mean the Vickers commission has come and gone, and they were supposed to solve the TBTF subsidy problem, or at least reduce the extent of the problem. So what progress? Well according to this article by Andrew Haldane the TBTF subsidy is bigger than ever! I.e. the “progress” has been negative.

And in the US, there has been the same failure to deal with TBTF – see first two paragraphs here.

The TBTF problem has been solved!!!!

Anyway, I have good news. There is a system that solves the TBTF problem, and several other banking problems at the same time.

The solution is set out here. Much the same solution is set out here.

The only apparent drawback with those solutions is that they involve depositors who want their bank to lend on their money to take a hair-cut if and when those loans go wrong. I.e. depositors in effect become shareholders in their bank. And that might seem to involve a rise in bank funding costs.

Well the answer to that criticism was given by Messers Miller and Modigliani: raising the proportion of bank creditors who are shareholders has no effect on bank funding costs.