He proposes two reasons why the banking sector might become smaller. One is the requirement for banks to hold more capital, which is highly desirable though likely to mean that their average cost of funds rises and so less saving will be channelled through the banks. A second reason is that banks will need to hold more reliably liquid assets. He argues that the lower capital and less liquid assets that banks held in recent decades reflected the belief that there was an implicit and explicit state insurance of banks. He says that a combination of implicit subsidies from state support, tax factors and optimism that steady growth and rising asset prices would continue, were reasons that accounted for the increasing importance of banks. Some of these forces are now working in the other direction.
Published on
16 December 2009
Press release