Bank of England warns UK's largest lenders they will pay the price for ending "too big to fail"

Jake Cordell
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Investment banks have been told there is
Investment banks have been told there is "no free lunch" when it comes to ending "too big to fail" (Source: Getty)

The Bank of England has told the UK's largest lenders that ending the era of "too big to fail" will make it more expensive for them to do business.

There will "inevitably be higher costs" for banks as a result of the new regulatory requirements being placed upon them, Jon Cunliffe, deputy governor for financial stability at the Bank of England, said this afternoon. However, he made no apologies for this and said banks needed to look closely at their business models to make sure they were prepared.

Part of the Bank's plans to end "too big to fail" includes so-called "bail in" procedures, which would see bondholders forced to take losses in the event that a bank ran into serious financial trouble. Because of this additional risk, those lending money to banks in the form of bonds are expected to demand higher returns - thus pushing up the cost of borrowing for banks.

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"Clearly, getting a creditor to accept this in advance has a cost; there will be a premium for carrying such an explicit risk," Cunliffe said in a speech in Brussels this afternoon.

"That cost is, however, simply the counterpart of the hidden subsidy being given to banks by the implicit taxpayer guarantee that applies if they cannot be resolved in an orderly way.

"Many larger banks will need to make changes to their structure and financing. There will inevitably be higher costs as the implicit public subsidy is removed. There is no free lunch," he added.

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Banks across Europe have seen their share prices tumble this year as sharp volatility has led many investors to question the safety of holding stock in Europe's lenders. Earlier today, Tidjane Thiam, chief executive of Credit Suisse, said: "January and February were simply two of the worst months ever in international markets."

But Cunliffe defended the imposition of extra regulatory burdens to protect taxpayers from needing to bail out banks in times of crisis - whatever the costs were to banks in the meantime.

"It will not be costless. And as the costs of ensuring orderly failure of large banks in bad times will fall on those banks in normal times."