Keith Anderson: Banks should have to pay a premium for the privilege of being "too big to fail"

Dr. Keith Anderson is a Lecturer in Finance at the York Management School at the University of York and a private investor.

When my Russian parents-in-law come to visit, I’m financially responsible for them. If they end up with a large hospital bill and they didn’t buy enough medical insurance, I pay for it. But that’s fair enough, because I explicitly agreed to that risk when I invited them. One of the most egregious features of the banking crisis is how we have found out after the event that we have all for years been implicitly on the hook, ensuring that no UK-based bank or building society ever goes bust. As the recent case of the Dunfermline Building Society shows, these bills are still coming out of the woodwork, and we are all still liable for untold billions more.

George Osborne is considering breaking up the nationalised banks, and preventing others from becoming too big. The trouble is, at the moment all the incentives work the other way. The larger a bank grows, not only do the executives get ever more perks and bonuses, but they also know that they are more likely to be bailed out should everything go disastrously wrong. So as Northern Rock showed most vividly, they grow larger and larger, faster and faster, taking whatever risks the regulator will allow them to take.

I have a suggestion that should ensure the same result, but will not involve the regulator trying to force the banks to do something when every other incentive is telling them to do the opposite. It also fits in with the Conservative philosophy of allowing the market to regulate itself wherever possible.