MARKETS The pros and cons of narrow banking, in which retail deposits are secured on safe assets such as government bonds, have been hotly debated in the UK, if not elsewhere. Yet the discussion of wider banking has focussed mainly on damping down casino activity, whether through swingeing capital ratios, curbs on bonuses or what have you. Less forthcoming have been ideas on how to reform the industrial organisation of the wholesale end of the business.
But now Andrew Haldane and Piergiorgio Alessandri of the Bank of England have suggested that we can learn something from, of all things, the hedge funds. In a paper on the relationship between the state and banks, they point out that unlike the over-concentrated banking sector, the hedge fund area has a large number of relatively small players.* Their business models are specialised rather than diversified, while entry and exit rates are high. Most hedge funds operate as partnerships with limited liability and have leverage less than a tenth of the largest global banks. Crucially, not one has cost the taxpayer a bean in the current financial seize up.
