Some banks are too big to fail. There is inevitably a last resort liability for taxpayers, for it is vital that bankers continue to make credit available. Otherwise economic activity will remain subdued. The problem is how to make banks safe while ensuring they continue to function as effective lenders.
Five years on from the start of the financial crisis, the search for a solution has yet to produce a result. Putting heavier and heavier capital requirements on banks is not the answer. Holding capital is expensive; so banks are tempted to reduce lending rather than increase the need for more capital. This conundrum lies at the heart of why our economy is still in the doldrums.
The suggestion put forward below, no doubt unpalatable to many, comes from a conversation I had with one of the most far-sighted City thinkers, who is keen (like many bankers) to preserve the reputation of London as a financial centre.