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End 'Too Big to Fail' by Making It Shareholders' Problem

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'Dodd-Frank Is Like the TSA': Comments of the Week
American Banker readers share their views on the most pressing banking topics of the week. Comments are excerpted from reader response sections of AmericanBanker.com articles and from our social media platforms.

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Comments (8)
Reenactment of Glass-Steagall, now in the Congress as H.R. 129, is a simpler, better solution that requires no regulation, no set-asides, works immediately, and is transparent to the public as well as bankers. It was successful until eviscerated and ultimately repealed in 1999. FDIC Vice Chair Thomas Hoenig endorsed it Jan. 16 for these reasons, as did Dallas Fed head Richard Fisher in all but name by calling for no federal bankstop for anything but commercial bank activities Jan. 17. Go back to it immediately to stop a hyperiflationary explosion by the Fed.
Posted by anitagallagher | Wednesday, January 23 2013 at 1:35PM ET
This is the most convoluted way to accomplish a simple task that I have seen yet on these pages. If the goal is to replace hyper-regulation with market discipline, then the method is simple: End deposit insurance. Announce the closing of the FDIC after a three-year "sunset" window.

Without the subsidy of deposit insurance, banks will restructure themselves into healthier, less risky economic entities. Safety and soundness will become a basis of competition, as will risk/reward. Shareholders and executives will bear their fair share of the risk. Some banks will remain very large specialists in transactional banking. Others will become specialized lending companies with deep expertise in their fields. Still others will become investment managers with a range of debt, equity and other funds. We will end up with a much stronger system that does a better job of satisfying its customers. Markets not subject to the distortion of politicized, government mandates are always more efficient.
Posted by Bob Newton | Wednesday, January 23 2013 at 1:47PM ET
Thought provoking article Professor Hurley. For there to be market discipline, however, banks have to have in depth on- and off-balance sheet risk disclosures, so that market participants, i.e. investors, ratings agencies, and retail individuals can discipline banks by walking away when they see transactions that are too risky or banks that are badly mismanaged. This would cause yields to widen and stock prices to fall; these market signals would be useful not only to investors but to regulators as well. Basel III's Pillar III has good guidelines for such disclosures, however, in the US this Pillar has not been adopted. In Europe, whilst being adopted it is not uniformly implemented, making the disclosures not terribly useful. Hence, market discipline remains an elusive ideal. Mayra Rodriguez Valladares, MRV Associates
Posted by MRVAssociates | Wednesday, January 23 2013 at 3:29PM ET
I agree with Dr Hurley's decision to include Section 165 of Dobb-Frank in his op-ed, for it lends credibility to his argument. But I respectfully disagree that the bail-outs of the banks was such a terrible thing. Unlike the GM bail-out the US tax-payers actually made money on the banks through interest and warrants in the tens of billions of dollars (I do not know the actual number).
Posted by Chip52 | Wednesday, January 23 2013 at 4:54PM ET
Banks would never be shareholders' problem. They have been and will be depositors' problems. Bank shareholders and CEOs have been the largest beneficiaries of high leverage permitted by bank regulators all over the world.You may just review Deposit to Equity,Return on Funds Employed and Return on Equity ratios of banks anywhere.Even minimum capital adequacy ratio of 8% of Basel permits 12 times leverage of risk capital. Must take care of depositors in any scheme of things.Banks are thus different from other businesses.
Posted by Center for Safe and Sound Banking | Wednesday, January 23 2013 at 5:23PM ET
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