A leading global fund manager has called for the global banking system to shrink by 25%, as market turmoil increases pressure on an already beleaguered financial sector.
“The financial system has to shrink,” Peter Fisher, senior managing director of BlackRock, which had $3.66 trillion of assets under management (as of June 30), told the Institute of International Finance’s (IIF) annual meeting in Washington yesterday.
“We want to inject more capital into it to make individual firms stronger. But the system is too large, and my guesstimate is 25% shrinkage in North America and Europe.”
Global banking is in a perilous state. The IMF this week calculated that the euro area sovereign credit strain has had a direct impact of around E200 billion on banks in the European Union since the outbreak of the sovereign debt crisis in 2010.
The European Central Bank has had to lend to banks struggling to borrow in private markets, while ratings agencies have downgraded several major banks on both sides of the Atlantic in recent weeks.
The strain is prompting bankers, fund managers and policymakers to consider how the next bank failures should be resolved. Opinions differ as to whether any banks should be considered too big to fail, and what role the taxpayer should play in any subsequent restructuring.
Thomas Huertas, a member of the executive committee of the UK’s Financial Services Authority, said that previous methods of failed bank resolution had to be changed. “Better resolution is the key to financial stability,” he said.
Bankruptcy does not work for banks.” Bankruptcy for banks was tantamount to liquidation, he said, with severe impacts on creditors and the economy.
“Repeating Lehman is not a good idea,” Huertas said. “Nor, in our view, is continuing ‘too big to fail’. This is a policy too costly to continue.” He called for a “middle way, to resolve failing banks without putting them into liquidation and without taxpayer support.”
Huertas was challenged by Fisher of Blackrock, who said that what concerned him “greatly” was “whether we can really achieve a point where a major institution may be resolved without any recourse to taxpayer support”.
He continued: “I know that’s a consummation devoutly to be wished. But at the same time, it doesn’t seem to be practical to both do that, and address ‘too big to fail’.
“If we round to zero the likelihood the authorities ever have to reach into their own pocket, we will have created a class of institution that can never fail.”
In particular, he said, seeking capital to shore up banks was going to be difficult without confidence about banks’ futures. “Getting investors to pony up the capital is going to be tricky unless you give us the assurance that banks are too big to fail. So we’re bootstrapping ourselves into a position in which we are doubling down on too big to fail, not removing it.”
Fisher and Huertas were both speaking at an IIF session, at which Wilson Ervin, senior advisor to the CEO at Credit Suisse, called for wider use of the so-called “bail-in” approach to bank resolution, an intended middle ground between taxpayer bailouts and systemic financial collapse.
Bail-ins would involve giving regulators the authority to force banks to recapitalize using private capital from within the bank rather than public money.
Ervin argued that such an approach would not only make for better resolutions, but help to stop bank failures happening in the first place by reassuring investors.
“If you can get to a resolution regime that is clear and predictable and preserves value, I think the markets will value it,” he said. “If we can provide assurance we can get to that type of outcome [a bail-in rather than a bail-out or collapse] that would help to calm some of the issues around the financial sector.”