Global regulators’ push to solve the issue
of too-big-to-fail banks may hinder economic expansion,
according to banking industry groups.
Planned requirements for banks to have a buffer of
securities that can be written down in a crisis “will almost
certainly raise bank funding costs” and “can be expected to
have fallout effects on real-economy financing costs,” the
Institute of International Finance and the Global Financial
Markets Association said.
But does this mean that getting rid of such regulations is more perfectly competitive? I would think that the regulations lead to less moral hazard as the banks will take fewer risks. What do you think?
http://www.bloomberg.com/news/articles/2015-02-03/fsb-s-too-big-to-fail-bank-fix-seen-dragging-on-economy
I also agree that having regulations will better keep the banks or financial institutions in check to prevent them from taking on unnecessary risk. The question if too big too fail has always been fascinating to me. I have to disagree that some institutions are too big to fail, for example, Merril Lynch was a huge institution yet during the crises it went underwater which ultimately led to Bank of America buying the institution at a discounted price.
ReplyDeleteI also agree that having regulations will better keep the banks or financial institutions in check to prevent them from taking on unnecessary risk. The question if too big too fail has always been fascinating to me. I have to disagree that some institutions are too big to fail, for example, Merril Lynch was a huge institution yet during the crises it went underwater which ultimately led to Bank of America buying the institution at a discounted price.
ReplyDeleteI agree with Phil, the idea of being "too big to fail" is a rather strange topic to think about. But I would agree, more restrictions (which would undoubtedly be fought by people within the banking business) would allow people to be more confident in their bank doing the right thing with their money. Less risks may mean less money in the short term, but more stability in the long term.
ReplyDeleteI disagree with the posts above. While "too big to fail" isn't ideal by any means, these companies do drive industry within the US and promote GDP growth. The economy is in the shape it is now because these financial institutions are hesitant to take on any risk/debt because of the crisis. There is limited funding and opportunity to invest.
ReplyDeleteAs for Merrill Lynch failing, they failed in name only. All their debts and assets were assumed by Bank of America. If they were not bought they would have been bailed out by the government or Fed, they were just simply too big to fail and create another Lehman situation.
Furthering Nolan's "too big to fail point," these institutions also had many foreign investors as well, and were also invested in many foreign governments and businesses. Their failure would've have reasonably been globally catastrophic. Certainly not ideal.
ReplyDeleteAlthough these financial institutions are hesitant to take on hefty risk, it's important to understand that these institutions facilitated the 2008 crash, as they bore egregious amounts of risk (i.e., AIG's rampant CDS issuances and predatory loans). Their hefty risk then became a reality, and the vast majority of these institutions had a client base that couldn't pay them back, or in AIG's case, owed $440 BB to institutions, households, and governments worldwide. $440 BB, which of course, the company didn't have.
Tightening up regulation, with a specific focus on risk undertakings and loss absorption seems like the best strategy to ensure this won't happen again. And it's obvious that banks and other industry trade groups are going to be opposed to this... it makes bankers' jobs even more difficult, and firmly degrades their autonomy. Given the past events, however, banks can't quite be trusted with the autonomy they once enjoyed.