It would be justified to draw up regulation against speculation for major banks because their collapse could jeopardise the financial system as a whole, a top European Central Bank official said Monday. The sheer size and interconnectedness of so-called "systemically important financial institutions (SIFIs) ... would justify ad-hoc regulation to ensure that SIFIs are extra-safe," ECB executive board member Lorenzo Bini Smaghi told a banking conference here.
"The failure of one of them could cause a financial crisis; however, the social cost is not borne by SIFIs' shareholders alone. Furthermore, moral hazard can result from the fact that they are aware of their systemic relevance," Bini Smaghi said. Therefore, special rules for major banks would be justified, he said. Bini Smaghi argued that separating commercial banking from other activities such as investment banking would help to protect deposit holders by insulating them from excessive risk-taking by the banks.
Nevertheless, simply splitting the two different areas of activity "would reshape the financial industry and affect the transmission channels of monetary policy in ways that are hard to predict," he said.
Such a move would mean that commercial banks would function in a more traditional way and focus on lending. "On the other hand, they might become relatively less important within the financial system" and therefore reduce the impact of such a move, Bini Smaghi said. Any such move "would be an issue for empirical, policy-oriented research," he concluded.