The UK government's plans to prevent a second damaging financial crisis were called into question on Tuesday when a group of economists from the International Monetary Fund said the costs of ring-fencing speculative City activities could outweigh the benefits.
A discussion paper written by six IMF staff members said policymakers in the UK, the US and the European Union should consider tailoring their solutions to the riskiness of individual banks rather than imposing blanket solutions.
While accepting that the reforms reflected a deep sense of unease with the risk culture in evidence before the crisis of 2007, the study – a discussion paper and not official IMF policy – called for a global cost-benefit analysis that would show whether the reforms were worthwhile.
The authors said: "The structural measures to reform banks such as the US Volcker rule, the UK's Vickers ring-fence, and the EU's Liikanen proposal, which would create functional separation of businesses, all reflect a deep sense of unease with the risk culture engendered by the assumption of trading and speculative investments by deposit-taking banks."
But they added that the proposed reforms would not have prevented the crisis at Lehman Brothers in September 2008, the event that brought the global financial system to the brink of collapse.
"Looking back, however, restrictions on proprietary trading or investments in private equity alone would not have prevented major bank failures such as Lehman Brothers. Nor would reorganising the bank into separate subsidiaries in each host and home country have facilitated its global, group-wide resolution."
The study said Britain, the US and the EU were important financial centres and that they could bring benefits to the global economy if the structural reforms led to greater stability.
"Nevertheless, our analysis suggests that these policies will also have potentially significant global costs given that they will be imposed on internationally active and systemic financial institutions.
"Our assessment points to the need for a global cost-benefit exercise encompassing the extraterritorial implications of structural measures. This is necessary to confirm whether the benefits of structural measures match or exceed costs at a global level as it would be difficult to justify them otherwise."
The study raised three possible objections to the reforms: the challenge of implementing them successfully; the possibility that risk would migrate to other parts of the financial system, such as "shadow banks"; and that there would be costs in making banks less diverse.
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