Size does not matter (well, not that much….)

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The FT notes:

Switzerland upped the ante in a global regulatory assault on the banking industry on Thursday as its central bank warned that Zurich was examining the forced shrinkage of banking groups such as UBS and Credit Suisse to contain the risks posed by their size.

The central bank is looking at imposing constraints on the size of its biggest domestic banks unless global policymakers can come up with a new system to deal with large banks when they fail.

Philipp Hildebrand, vice-chairman of the Swiss National Bank, said: “There can be no more taboos, given our experiences of the last two years.”

“There are advantages to size . . . [but] in the case of the large international banks, the empirical evidence would seem to suggest that these institutions have long exceeded the size needed to make full use of these advantages,” Mr Hildebrand said as the central bank unveiled its stability report.

So we split major banks in two.

But they still are opaque.

They still won’t lend to customers.

They still play the casino.

They still trade with each other so that the risk is systemic, not specific.

And then what’s very clear is that we’ve got nowhere by doing so.

It’s not size that matters. It’s the fact that the model is wrong. Shrinking it will not make it fit the need we have. Changing it will.