Saturday, November 29, 2008

Don't Bank On It

All the talk this weekend about the Government sorting out the Irish banks via recapitalisation got me thinking about Nassim Nicholas Taleb. Much of the current thinking about the future of Irish banking foresees greater consolidation among the banks with a view to creating larger, less vulnerable institutions.

The problem is: we might get more than we bargained for. As Taleb points out in this interview alongside his mentor Benoit Mandelbrot, concentration is what got us into this mess in the first place. A healthier system is one characterised by diversity and redundancy: that way, if one part fails then it isn't catastrophic for the rest of the system.

The exact opposite of what is planned for Irish banks. The more I think about it the more I'm convinced we need to let weaker banks fail - though protecting savers - whilst maintaining low barriers to entry for new banks to ensure diversity: and less vulnerability to shocks.

1 comment:

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