The dismantling of ING is one of the toughest interventions yet by Europe's competition authorities, which waved through state aid to financial groups during the crisis but made clear these would be subject to scrutiny if they later appeared too generous.

ING must offload its insurance business, worth an estimated 12bn euros [US$17.8 billion] - 15bn euros, and focus solely on banking to meet the commission's demands, a decision that goes substantially further than expected. The break-up also includes a requirement that ING sell ING Direct USA, its US banking arm.

ING will be left with a balance sheet about 45 per cent smaller than before it turned to the state last year, roughly equivalent to Commerzbank, the German lender. (Financial Times, October 26.)

Shares in ING plunged 18 per cent yesterday after the group surprised the market with a larger-than-expected cash call and plans to sell off the group's insurance and investment management operations.

In compliance with the European Union's competition commission, the Dutch financial group said it would raise 7.5bn euros (US$11.1bn) via a rights issue to help repay Dutch state aid and fund repayment penalties for state guarantees on risky assets.

The capital raising was 2bn euros higher than analysts at Keefe, Bruyette & Woods had expected, and the brokerage said it had put ING's price target under review. (Financial Times, October 27.)

It is impossible for regulators to prevent business failure, and undesirable to pursue that objective. The essential dynamic of the market economy is that good businesses succeed and bad ones do not. There is a sense in which the bankruptcy of Lehman was a triumph of capitalism, not a failure. It was badly run, it employed greedy and overpaid individuals, and the services it provided were of marginal social value at best. It took risks that did not come off and went bust. That is how the market economy works.

The problem now is how to have greater stability while extricating ourselves from the "too big to fail" commitment, and taking a realistic view of the limits of regulation. "Too big to fail" exposes taxpayers to unlimited, uncontrolled liabilities. The moral hazard problem is not just that risk-taking within institutions that are too big to fail is encouraged but that private risk-monitoring of those institutions is discouraged.

... Their activities underwritten by implicit and explicit government guarantee, it is increasingly business as usual for conglomerate banks. The politicians they lobby sound increasingly like their mouthpieces, espousing the revisionist view that the crisis was caused by bad regulation. It was not: the crisis was caused by greedy and inept bank executives who failed to control activities they did not understand. While regulators may be at fault in not having acted sufficiently vigorously, the claim that they caused the crisis is as ludicrous as the claim that crime is caused by the indolence of the police.

The governor of the Bank of England is one of the few public officials to have grasped that the primary purpose of regulation is to protect the public, both as taxpayers and users of financial services, and not to promote the interests of the financial services industry. When the next crisis hits, and it will, that frustrated public is likely to turn, not just on politicians who have been negligently lavish with public funds, or on bankers, but on the market system ...

Federal Reserve Board governor Daniel Tarullo said Wednesday that he opposes the "provocative idea" of getting banks out of the business of trading risky securities so they can focus on lending.

In a speech to a business group, Tarullo said he doubted any such ban would end the problem of too-big-to-fail institutions, laying out a pair of objections to the idea of legislation intended to split banks up by their lines of business.

For one thing, Tarullo said, splitting them up wouldn't end too-big-to-fail concerns because banks have shown the ability to get into trouble through risky lending alone.

Moreover, trading in higher-risk securities would have to go somewhere else if banks couldn't engage in such activities and wherever it went, the too-big-to-fail problem would go along with it, he said. (Wall Street Journal, October 21, 2009.)

First would be creation by Congress of a special resolution procedure for systemically important financial firms ... A related innovation would be a requirement that each major financial institution draw up and submit for approval to its supervisors a plan for orderly wind-down in the event of serious liquidity or solvency difficulties.

A second kind of market discipline initiative is a requirement that large financial firms have specified forms of "contingent capital." ... a regularly issued special debt instrument that would convert to equity during times of financial distress could add market discipline both through the pricing of newly issued instruments and through the interests of current shareholders in avoiding dilution.

A third improvement in market discipline could come through judicious extension of disclosure requirements for regulated financial institutions. Disclosure requirements have at times served as too easy an answer to calls for market discipline ... However, an organized inquiry of actual and potential investors might identify discrete categories of information thought to have particular salience for purchase and pricing decisions.