Bank of England's executive director for financial stability, Andy Haldane, says "there is not so much as a scintilla of evidence of bigger being better in banking is the truth of it. A lot of the noise around that really is rhetoric." He also believes that UK should support regulation that risks losing some financial business.

In an interview with the BBC World Service to be broadcast today, Haldane also rejected the idea that banks need to be big in order to compete globally or be innovative for the public good.

"Some of the downsides of carrying around a big financial system are now evident to all,"Haldane said.

"If some of that were to migrate overseas that would be unfortunate, but given the costs of carrying that financial system around, it may be a price worth paying."

Following the announcement in last week's Pre-Budget Report, of a one-off 50 per cent tax on bank bonuses, to be paid by banks rather than individuals, the industry has threatened to move to more compliant/friendly locations.

"One of the lessons we've learnt is that those institutions that spread the risk disease furthest and in the biggest way ought to be subject to more stringent, and harder-hitting regulation up front," Haldene  says and adds:  "It's true that the lobbying effort of the financial sector should not be under-estimated. Equally, the way to beat that back is by appealing to logic and to evidence."

In its twice-yearly Financial Stability Report issued yesterday, the BoE says that the financial system has been significantly more stable over the past six months, underpinned by the authorities’ sustained support for the banking system and monetary policy measures. Low risk-free interest rates and reduced uncertainty have led to a rebound in a range of asset prices.

The report says primary issuance in many capital markets has resumed, reducing financing risks for some borrowers. The market rally has boosted bank profits, lowered concerns about potential future losses, and has enabled banks to raise further external capital. Banks have also been able to issue unguaranteed term debt, helping them to reduce their reliance on short-term funding.

At the same time, the report notes that after such a prolonged period of exuberance earlier in the decade, it is inevitable that some banks around the world have overstretched balance sheets. They will take time to adjust, and in the meantime remain vulnerable to the risk of less rapid than expected economic recovery.

Visual Summary of the Financial Stability Report: Download PDF (586k)

Financial Stability Report, Issue 26: Download PDF (4Mb