The Bank of England’s Andrew Haldane on banking, risk and how to bring social and financial equity back into the system:
Consider the effects of the too-big-to-fail problem on risk-taking incentives. If banks know they will be bailed out, those holding their debt will be less likely to price the risk of failure for themselves. Debtor discipline will therefore be weakest among those institutions where society would wish it to be strongest. This encourages them to grow larger still: the leverage cycle isn’t merely repeated, but amplified. The doom loop grows larger. The biggest banks effectively benefit from a disguised, and growing, state subsidy. By my estimate, for UK banks this subsidy amounts to tens of billions of pounds per year and has often stretched to hundreds of billions. Few UK government spending departments have budgets this big. For the global banks, the subsidy can reach a trillion dollars – about eight times the annual global development budget.
“The Doom Loop.” — Andrew Haldane, London Review of Books
See also: “Secret Fed Loans Helped Banks Net $13 Billion.” — Bob Ivry, Bradley Keoun, Phil Kuntz, Bloomberg Businessweek, Nov. 27, 2011