No Bank is too Big to Fail

FDIC's Bair Questions Need for Large, Complex Financial Firms

Ms. Bair, who as protector of the nation's deposits has been at the fore of government efforts to deal with the financial crisis, questioned the need for firms considered "too big to fail." Instead, she said, the U.S. needs to have a system where one firm can be allowed to fail without the entire system breaking down.

That has been the key issue for policy makers trying to stabilize the U.S. banking system. Government policy has been to not let any of the major banking institutions collapse because of the potential follow-on effects to other institutions.

Ms. Bair said larger, more complex firms should face additional capital charges, restrictions on leverage and new risk-based premiums as a way to discourage aggressive growth and complexity.

"When a financial system includes a small number of very large, complex organizations, the system cannot be well-diversified," Ms. Bair said.

She also used the opportunity to take a swipe at the Basel II international capital framework regulators from around the globe had been working on before the current financial tumult occurred.

"In hindsight, it is now clear that the international regulatory community over-estimated the risk mitigation benefits of diversification and risk management when they set minimum regulatory capital requirements for large, complex financial institutions," Ms. Bair said

FDIC's Bair: No bank is too big to fail

Speaking at a luncheon sponsored by the Economic Club of New York Monday, the industry's top regulator said that the lack of such a mechanism has sustained the belief that some financial institutions are just simply "too big to fail" - a notion she said must be done away with.

"We need an effective resolution mechanism, not a get-out-of-jail free card," Bair said, speaking to an audience that included many high-profile members of the financial services community.

"The sooner we modernize our resolution structure, the sooner we can end too big to fail."

Now while I don't support the idea of the Government telling a private bank how large it can be, she does have a good point. At what point does size become a hindrance? Furthermore, if it brings and end to more government interference, i.e., too big to fail, then it is certainly an idea that should be explored. One government interference to end future government interference on a larger scale, seems like an example of the ends justifying the means.


Artfldgr said...

what point does size become a hindrance?

at the point that the entity cant survive by using other means and manipulation of the state to help it and hinder competition.

prior to that it was as large as an honest bank could get. but beyond a certain point, its too big, just as corporations get too big. then it seeks to survive and grow by utilizing other means than what they are in business for. people attacking them and manipulating them facilitates this as it provides the necessity of the entities that cant distinguish protecting onself from the threats of being attacked and protecting oneself from the consequences of being over large without fracturing.

no one cares about a huge entity that works honestly and not with ulterior means and acts. but at least some care or are aware of that most that grow that large are in some way beholden to the state through all manner of things. deals that technically should never be made... (but dont get me started with what taxes have warped into having nothing to do with collecting to pay the public bills)

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