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There is no simple solution to "too big to fail," a complicated problem born of a series of policy missteps that will take years to unwind. The sooner everyone accepts that reality, the sooner we can tackle the necessary items to make sound public policy.
April 3 -
Regulators' blunt criticism of resolution plans of the 11 most complex banks still leaves pivotal questions about how the process moves forward, including what banks must do to avoid serious consequences.
August 7 -
Incessant lawsuits and enforcement actions convert a taxpayer problem into a shareholder concern, immune to lobbying efforts. The surge will lead to restructuring efforts, including spinoffs, as managers seek to simplify operations and improve performance.
September 17
Former Federal Reserve chairman Ben Bernanke had a striking assessment of the dangers faced by the U.S. economy in 2008, according to a recently disclosed
The 2010 Dodd-Frank Act, which included the orderly liquidation living wills requirement, was meant to prevent future rescues of systemically important financial institutions. But the idea that current regulations are capable of solving the too-big-to-fail problem was challenged by the recent
There are several options for dealing with too big to fail. Unfortunately, some of the most promising options are also among the most unlikely.
SIFI banks might voluntarily reengineer themselves to become small enough to fail again. The SIFI experiment is relatively recent, having begun in the mid-1990s in the midst of deregulation and large bank consolidation. Since the experiment went bust within 10 years of its start, with all of the countrys largest banks requiring government bailouts, one might question the usefulness of preserving such a toxic model. But big banks continue to be implicitly supported by the government, and they have little incentive to give up the benefits that their size accrues to them.
An alternative would be to make big banks too safe to fail by substantially increasing their equity capital levels, along the lines of the proposal outlined by Anat Admati and Martin Hellwig in
My preferred approach would be to reduce the size of SIFIs so that they are small enough to fail. This could be achieved through ring-fencing various business lines and spinning off others. This action reduces the size of a banks vulnerability rather than simply responding to the crisis. Whatever alleged loss of efficiency banks incurred would be offset by increased financial stability. Unfortunately, an equally stiff resistance to this idea can be expected.
Another possibility would be for legislators and regulators to recognize that big banks are de facto
The most likely course of action is that regulators will maintain the status quo and change nothing of substance, relying on cosmetic fixes to give voters a false sense of security. Some free market enthusiasts might argue that the status quo isn't so bad, so long as customers and not regulators decide how big banks should be. But the SIFI market is anything but free. The big bank model failed in late 2008; in a free market, these banks would have ceased to exist. They survived because they are the creations of the government, not the free market. Exempt from market discipline, they represent crony capitalism at its worst.
Unless something changes, big banks will continue to blow up, and taxpayers will continue to rescue them. It's all too easy to imagine facing another October 2008. At least we have Bernanke to thank for reminding us of this risk.
J.V. Rizzi is a banking industry consultant and investor. He is also an instructor at DePaul University Chicago.
