Structural Reform, Too-Big-To Fail and Banks as Public Utilities in Europe

Abstract

Since the global banking crisis in 2007 and 2008 and the more recent euro sovereign debt crisis there have been growing calls to rethink the way banks are monitored and governed. Banks have been forced to take on more capital and liquidity, remove riskier types of activity and also shrink their balance sheets. Numerous new rules have been put in place to constrain their risk-taking business including moves to remove executive excesses by curtailing their remuneration packages. All these new rules place a straightjacket around banker’s activities and as a consequence inhibit their freedom and this new environment has led various commentators to talk about banks being no more private free-wheeling profit-maximising firms, but more like public utilities that provide a service to society that should be regulated more heavily, namely limiting prices and profits. These arguments stem from the similarity that banks have with public utilities and the problems associated with current banking size and structures. This chapter outlines various features of European banking along with a brief analysis of proposed structural regulatory reforms aimed at reducing the likelihood of systemic bank failure, too-big-to-fail guarantees and other forms of taxpayer support for troubled banking systems. We finish off by looking at why banks are maybe turning into public utilities.