After the financial crisis in 2008, Congress demanded that big banks regularly provide regulators with careful plans (called living wills) for how they would enter bankruptcy in an organized fashion. However, the Fed recently found that five major banks were "not credible" or "would not facilitate an orderly resolution" as required. Congress made this requirement to reduce the threat that another banking collapse would have on the entire economy. In other words these requirements were made to avoid and the "too big too fail argument". The Fed has given these banks until October 1st to fix their plans or else they will impose restrictions.
Why do you think major banks such as JPMorgan Chase and Bank of America, have not followed the regulations set upon them by Congress, and what do you think the appropriate punishment should be?
Also the "too big to fail" issue has been relevant in the presidential race, with those who want to break up banks using this as proof that large banks are too big and complicated and can still fail. What do you think about this argument and about the state of large banks.
http://www.nytimes.com/2016/04/14/business/dealbook/living-wills-of-5-banks-fail-to-pass-muster.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=first-column-region®ion=top-news&WT.nav=top-news
Why do you think major banks such as JPMorgan Chase and Bank of America, have not followed the regulations set upon them by Congress, and what do you think the appropriate punishment should be?
Also the "too big to fail" issue has been relevant in the presidential race, with those who want to break up banks using this as proof that large banks are too big and complicated and can still fail. What do you think about this argument and about the state of large banks.
http://www.nytimes.com/2016/04/14/business/dealbook/living-wills-of-5-banks-fail-to-pass-muster.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=first-column-region®ion=top-news&WT.nav=top-news
I am not sure if banks are going out of their way not to comply with government regulations. But at the same time, they are aware of the penalties that might face if they do not comply. I think the penalties that the article mentions is appropriate. They are given adequate time to make changes.
ReplyDeleteJPMorgan Chase and Bank of America are extremely large banks and have gained a huge customer base by doing things a certain way. I think the banks just don't want to lose profits or stay away from the way they have always done things. Also I think that these two banks in particular don't think they will ever fail. I know that it is a possibility for any company no matter how large, but the owners probably don't want to see any faults. In addition, these banks don't want to ensue fear in their clients or shareholders that they think they might need these precautions because the owners think there is a possibility these banks could fail. If they spread this mindset, then they might lost customers and actually fail.
ReplyDeleteThis goes back to moral hazard I believe. The banks may still be convinced that if they violate these rules, but are still vital to the economy when/if they fail, they will get bailed out again.
ReplyDeleteDefinitely, the actions that big banks took can be explained only by "moral hazard". In order to prevent these unethical situations in the future, the government should show one miserable example that the FED does not become a lender of last resort. This brave decision by the government will terrify banks and give signals that the government will not ignore moral hazard anymore.
ReplyDelete