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Too big to fail

October 10, 2011

One of the biggest qualms against the folks down at zucotti park is they lack a central theme/cause. I’m all for signs and slogans that read “End moral hazard”, “fight inequality”, “Bankers suck”. Folks need a tangible/attainable goal. At the end of it all what can make people look back and say – we achieved something?

Some regulators acknowledged how totally ass backwards things were in 2008 as private institutions were bailed out while the rest of the economy ate fried dog shit. The Dodd Frank bill was intended to address many of these issues – the bill was signed into law – but not many of us are aware that many aspects of the bill are still being debated. Some Republicans are attempting to repeal or water down many aspects of the bill. Banks are spending millions (if not billions) on lobbyists to argue against the “costs of regulation”. Banks argue that any attempt to reign them in will hurt the economy and the fragile recovery. Jamie Dimon went so far as to say the regulators are un-American.

Now I’m all for free markets and less Govt – but the line between banking and govt is so blurred nowadays it’s hard to tell between the Central bank and the bank of America.

As I’ve mentioned before – if banks are so damn important and critical – then they should be regulated as a utility.

One of the most important issues in regulatory reform is the notion of systemically important financial institutions. This framework is designed to remove the advantages banks derive from being too big to fail. Under the Dodd-Frank Act (DFA), the Financial Stability Oversight Council (FSOC) has the authority to designate a financial institution as systemically important. If designated, such institutions will be subject to tighter liquidity and capital standards as well as closer supervision.

I would not have used the term “important” which implies these institutions will be given preferential treatment. The name should be systemically obese banks or “SOB”. The designation should be a “scarlet letter,” a sign that their profits would be reduced due to higher capital and liquidity requirements.

The rules should be adapted so these institutions have incentive to shrink.

We need to ensure the list of institutions that make this list is significant. Here is a bit of a problem because the entire industry is over-leveraged. 10-1 is excessive – some banks are currently leveraged as much as 40-1!! Thats what makes these institutions susceptible to failure. Either way, the more institutions included on the list the better.
Currently, there is a split among regulators. The Federal Reserve and the Treasury want to designate only a few (less than 10). On the other hand, the Federal Deposit Insurance Corporation (FDIC), in charge of winding down systemically important financial institutions, prefers to designate about 30 to 40.

Every bank holding company with over $50 billion in assets should be automatically included in the list. The Basel Committee on Banking Supervision (BCBS) needs to understand that people are serious about ending TBTF. These regulators must set the additional required capital at levels sufficient to provide a disincentive for banks facing the highest charge to remain too big to fail.

3 Comments leave one →
  1. October 11, 2011 3:23 am

    Preaching to the Choir:
    Why the deregulation attempts don’t get any media attention is appalling. Following the banking crisis, collectively, the government essentially stated that the banks had willfully and criminally, beat and robbed the economy nearly to death. The government did not seek criminal indictments or prison terms against the bankers, but gave them a warning and passed legislation aimed to prevent the bankers from being able to repeat their crimes. Before the regulations even came into effect, the politicos you mentioned, began clamoring, “Well let’s not be too hasty.” I hate to keep framing things in Orwellian terms, but in this case, it’s a classic case of double-think. As usual, the republicans camouflage their special interests’ agenda with fear. Before it was fear of an amorphous foreign threat, now it’s fear of domestic fiscal ruin. Although one might think it is counter intuitive to reward the very perpetrators of the latest financial crisis, it can be accomplished with enough fear mongering. Their argument is that regulating the very institution that was able to cause an economic crisis due to deregulation, would cripple the economy and prevent an economic recovery. Logic would seem to dismiss this argument, but logic and the electorate do not always see eye to eye. There is a large enough segment of the electorate who after being subjected to enough of this lobbyist paid for double-think, are either afraid enough, or desperately hopeful enough, to convince themselves that the double-think is true. Bah.

    “Make the lie big, make it simple, keep saying it, and eventually they will believe it”. -Adolf Hitler

  2. October 11, 2011 1:09 pm

    You should be a little more focused with tags, etc, so people might find it

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