4IpaUJbnm

crisis. Separation in the midst of a crisis would be ineffective and even dangerous. Crisis
resolution of complex banking organizations would be highly difficult and costly. As separation
must occur in advance, investors and management must be clear whether they are guaranteed
or not before the guarantee is invoked. Otherwise perceived implicit guarantees would provide
wrong incentives.
Technically, the process of separation is not that unequivocal [Position Paper…, 2013]. It should
take into account the size and organization of banking enterprise, diversity of banking system
and also regional conditions. If a commercial bank is in the same group as an investment one,
all trading should be by default allocated to the investment bank and commercial to the other.
Sometimes it might be possible to allow limited trading activity in the guaranteed entity, but
the type of that should be limited to simple financial instruments and exposure fully covered
with capital requirements. The same exception could refer to small deposit banks, not united in
banking group.
As a rule, however, the process should lead to separate legal entities, with separate capital
structures and governance and with no possibility of any support from the guaranteed entities
to the un-guaranteed ones. Trying to untie the often complex and intricate structure of the
bank holding companies, approached proposed by the OECD could be taken into account. It is
focused on a concept of the non-operational holding company (NOHC) [Blundell-Wignall,
Wehinger, Slovik 2009]. The parent of the structure would be non-operating, raising capital on
the stock exchange and investing it transparently. Subsidiaries would each issue equity, held by
the parent, and pay dividends to the parent, which it pays on to external shareholders of the
NOHC. Any debt would be raised only at the subsidiary level. Both commercial and investment
subsidiaries would raise debt separately. Consequently, the costs of funding for the commercial
and investment subsidiary would be separated and the benefit of the government guarantee
for commercial one would not be reflected in the funding cost of the investment one.
Implementing of NOHC would benefit also in permitting synergies and economies of scale and
scope. Organizational structure, technology platforms and back-office functions could be
shared. Such a transparent structure would also make it easier for regulators and market
players to see potential weaknesses and undertake in advance appropriate actions in case of
any instability symptoms.
Would the separation end up with TBTF?
It must be accepted, that banks will sometimes default. Any precautionary measures couldn’t
prevent it completely. Ultimately we may then face the dilemma “How to reduce the cost of
government intervention?”. Separation of commercial and investment banking can not only
reduce number of perils, but also make insolvency easier, cheaper and less painful [Capie,
Wood 2013].
Banks should not be that big that their failure causes problems for the whole economy and
therefore governments have to rescue them. A whole range of measures might be useful for
putting end up with Too Big To Fail (TBTF) concept. These include in particular: implementing a
strict bail-in regime, putting a cap on bank leverage, empowering recovery and resolution
plans, considering caps on size. Separation can be implemented alongside with other measures.
Sensibly approached and in conjunction with other measures, it will create two or more smaller
banks in place of one bigger. But it is not only the issue of arithmetic division of assets.
301