Ex-Barclays boss: Problem of ‘too big to fail’ still exists

Putting in place an effective bank resolution regime as well as eliminating regulatory arbitrage are two of the steps needed to solve the ‘too big to fail’ problem in the financial services sector, according to the former chief executive of Barclays Bank, Bob Diamond.

It is five years since the collapse of Lehman Brothers, which triggered a market meltdown in Sept 2008 and forced the Government here to introduce a bank guarantee.

Mr Diamond, in an opinion piece in the Financial Times, argues that even though some important financial market reforms have been implemented over the past few years, the problem of ‘too big to fail’ still exists.

US, EU, and British regulators must put in place an effective resolution regime that can handle the orderly wind-down of banks, he said.

As it stands, there are still considerable differences between Germany and the European Commission over the region’s resolution regime.

Mr Diamond won widespread acclaim for steering Barclays through the financial crisis relatively unscathed. But an appearance before a House of Commons committee on banking in 2010 saw him branded as arrogant and out of touch when he refused to accept that there should be any cap on bankers’ pay.

He was forced to step down in 2012 when Barclays was implicated in the Libor rate-rigging scandal.

As well as an effective resolution regime, Mr Diamond argues that banks must be subject to the same capital, liquidity, and leverage across different jurisdictions based on internally agreed standards such as Basel III.

Otherwise, there will be regulatory arbitrage, with banks taking excessive risks in regions or countries with more lax regulation, he warned.

There has to be more coherence in the approach to regulation, Mr Diamond said. In the US, the Volcker Rule banning investment banks from proprietary trading “was not co-ordinated with other jurisdictions. Europe is pursuing an entirely different approach to separate trading and banking activity. Meanwhile, the UK has approved a plan to ‘ringfence’ retail and commercial banking activity.”

Mr Diamond is the latest high-profile figure to contribute to the debate on regulation of the banking system over the past few weeks. British economist John Vickers headed the UK independent commission on banking and last week called for core tier one capital to be increased to 20% and the leverage ratio to be doubled.