Harry Potter and the Goblin Bank of Gringotts

We know that Gringotts Wizarding Bank is the sole bank for witches and wizards in all of the United Kingdom. This makes it too big to fail. Though economics is not taught at Hogwarts School of Witchcraft and Wizardry, the magical world follows many of the same laws of economics as the muggle one. As muggles found out in 2008, if a too-big-to-fail institution is threatened with collapse, it can harm the economy beyond the financial sector. We look at one of the simplest policy proposals in regards to the problem of Gringotts size. Namely, what happens to financial stability if we split it up to make multiple smaller institutions?

To analyze this question we calibrate and simulate the wizarding economy. Due to the literature on the Wizarding World, we are able to find an official exchange rate of roughly £5/Galleon. But official exchange rates determined by the government do not tell the full story. In terms of purchasing power (comparing costs of newspapers), the more accurate exchange rate should be £376.90/Galleon (roughly $493/Galleon at August exchange rates). Then comparing the cost of Hogwarts to the price of other elite British boarding schools we are able to deduce a “true” tuition cost of roughly £2,500,000/year or $3,700,000/year (paid by the Ministry of Magic). Ultimately this leads to a GDP per capita in Wizarding UK of approximately $8,400,000, significantly higher than the $55,836 in the United States.

With these numbers, we found that breaking up Gringotts would be devastating during a financial crisis. By splitting it up the banks would require an external bail-out rather than the implicit bail-in that the single institution provides. The costs of a crisis would be 10%-50% of GDP more expensive after splitting up Gringotts depending on the stress scenario (for instance rumors of Lord Voldemort’s return or the threat of muggles discovering the Wizarding World). We note that this ignores the possibility that the split up institutions change strategies after they lose the too-big-to-fail designation and can no longer rely on a bail-out to save them.

That is, unless the goblins at Gringotts have an infinite supply of Felix Felicis to avoid any market downturn.

For the full story, see Harry Potter and the Goblin Bank of Gringotts.