Their findings suggest the FSB capital surcharge of 1 - 2.5 % of risk weighted assets on systemically important financial institutions is sound. It goes beyond the minimum requirements for all banks to address the social costs of SIFI's risky strategies.
NIESR, in collaboration with Brunel University, has recently published Economic and Social Research Council and Financial Services Authority funded research which looks into the effect of bank size on risk taking.
They find that larger banks do take on more risk than smaller banks.
For larger banks, losses not only increase but the variability of losses also increases.
These losses are not covered by increases in the capital ratio which is shown to decline as banks get bigger. Large banks can thus benefit from higher upside gains but can suffer huge losses with costly systemic consequences.
Since individual SIFIs have not previously been taxed on their systemic effects, they have only focused on the larger upside gains that come from size.
They protect their shareholders from downside outcomes by relying on the lender of last resort for bailouts.
The cost is borne by taxpayers who must bail them out because they have become "too big to fail". Overall the authors' results suggest that the latest FSB package should ensure a reduction in the likelihood of future banking crises.
