Hair of the dog that bit us: New and improved capital requirements threaten to perpetuate megabank access to a taxpayer put
Edward J Kane, 30 January 2013
Do financial institution managers only owe enforceable duties of loyalty, competence and care to their stockholders and explicit creditors, but not to taxpayers or government supervisors? This column argues that in the current information and ethical environments, regulating accounting leverage cannot adequately protect taxpayers from regulation-induced innovation. We ought to aim for establishing enforceable duties of loyalty and care to taxpayers for managers of financial firms. Authorities need to put aside their unreliable, capital proxy: they should measure, control, and price the ebb and flow of safety-net benefits directly.
This column is a lead commentary in the VoxEU Debate "Banking reform: Do we know what has to be done?"
Topics: International finance
Tags: banks, Finance, financial regulation, global crisis, taxpayers, Too big to fail
Have we solved 'too big to fail'?
Andrew G Haldane, 17 January 2013
The Subprime Crisis became the Global Crisis when one too-big-to-fail bank was allowed to fail. This column argues that too-big-to-fail is far from gone despite years of reform efforts. It is important that it not be forgotten. Further analytical work, weighing the costs and benefits of different structural reform proposals, would help keep memories fresh and policies on the right track.
Topics: Financial markets
Tags: bank regulation, Too big to fail
Macroeconomic adjustment and the history of crises in open economies
Joshua Aizenman, Ilan Noy, 21 November 2012
Are countries that have previously experienced banking crises less vulnerable to them in the future? This column argues that, in fact, previous crises might make future crises more likely. There isn’t much evidence of a learning process from past mistakes because the regulator often lags behind banking’s pace of innovation. Preparing to prevent the last crisis does not prevent the next and it seems that the ‘too big to fail’ doctrine provides cover for banks, delaying the day of adjustment.
Looking at recent banking crises, Gourinchas and Obstfeld (2012) have identified domestic-credit booms and real currency appreciation as the most significant predictors of future banking crises in both advanced and emerging economies1. An optimistic conjecture is that countries that previously experienced banking crises will tend to be more cautious.
Topics: Financial markets, Institutions and economics
Tags: Banking crisis, regulation, Too big to fail
Destabilising market forces and the structure of banks going forward
Arnoud Boot, 25 October 2011
The financial sector has become increasingly complex in terms of its speed and interconnectedness. This column says that market discipline won’t stabilise financial markets, and complexity makes regulating markets more difficult. It advocates substantial intervention in order to restructure the banking industry, address institutional complexity, and correct misaligned incentives.
The financial services sector has gone through unprecedented turmoil in the last few years. We see fundamental forces that have affected the stability of financial institutions. In particular, information technology has led to an enormous proliferation of financial markets, but also opened up the banks’ balance sheets by enhancing the marketability of their assets.
Topics: Financial markets, International finance
Tags: complexity, macroprudential regulation, systemic risk, Too big to fail
Incentive pay and bailouts
Tim Besley, Maitreesh Ghatak, 27 August 2011
As we approach three years since the fall of Lehman Brothers, the incentives that led the financial sector to take on too much risk still exist. This column argues that they will remain so long as governments continue to provide an implicit guarantee that banks will be bailed out. To tackle this, the authors dare to propose a tax on bonuses.
While it seems that the worst of the financial crisis of 2008 is over, most of the structural issues that lay behind it remain unresolved. This includes distortions in incentive pay due to government protection of investors from downside risk.
Topics: Global crisis, Global governance, International finance, Politics and economics
Tags: Bailouts, financial regulation, Too big to fail
Too much finance?
Jean-Louis Arcand, Enrico Berkes, Ugo Panizza, 7 April 2011
Over the last three decades the US financial sector has grown six times faster than nominal GDP. This column argues that there comes a point when the financial sector has a negative effect on growth – that is, when credit to the private sector exceeds 110% of GDP. It shows that, of the advanced countries currently suffering in the fallout of the global crisis were all above this threshold.
The idea that a well-working financial system plays an essential role in promoting economic development dates back to Bagehot (1873) and Schumpeter (1911). Empirical evidence on the relationship between finance and growth is more recent.
Topics: Financial markets, Global crisis, Macroeconomic policy
Tags: banking sector, financial regulation, systemic risk, Too big to fail
Multinational banks: They did not run away during the crisis
Giorgio Barba Navaretti, Alberto Franco Pozzolo, Giacomo Calzolari, Micol Levi, 23 May 2010
Many commentators have called for regulation to prevent banks from becoming “too big to fail”. This column adds a cautionary note. A world with only small and domestic banks is no safer. The key benefit of multinational banks – being able to mobilise funds across countries – could still be extremely useful for maintaining stability in times of distress.
A view shared by many has gradually emerged during the crisis, that a world with relatively small domestic banks is safer than one where large global institutions are also important players.
Topics: Global crisis, International finance
Tags: financial regulation, global crisis, multinational banks, Too big to fail
A regulatory architecture for cross-border banking groups
Stefano Micossi, 16 March 2010
Policymakers and commentators have suggested that large banks should be broken up. This column argues that such an idea risks the very existence of a global financial system. It outlines an alternative framework in which deposit insurance should be covered by banks not taxpayers, banks should not be guaranteed a bailout, and regulators should be mandated to step in when the warning signs begin.
Following the demise of Lehman Brothers, the debate on regulatory reform has led to the conclusion that large banking institutions must be broken up and their risk-taking activities limited by law along the lines of the ‘Volcker rule’ (Gros 2010).
Topics: Global crisis
Tags: financial regulation, moral hazard, Too big to fail
Too interconnected to fail = too big to fail: What is in a leverage ratio?
Daniel Gros, 26 January 2010
Did allowing financial institutions to become “too big” play a role in the financial crisis? This column argues that being “too interconnected” is also a factor, and that US accounting standards should recognise gross derivatives exposure on the balance sheet to make this interconnectedness, and the resulting exposure, clear.
By now there is general agreement that a financial institution can not only be “too big”, but also “too interconnected” to fail. But how do we measure what it is to be too interconnected?
Topics: Financial markets, Global crisis
Tags: Accounting, leverage, Too big to fail
Policymakers must prevent financial institutions from becoming too connected to fail
Jorge A. Chan-Lau, Marco A. Espinosa-Vega, Kay Giesecke, Juan Solé, 2 May 2009
The current financial crisis has underscored the problem of institutions that are too connected to be allowed to fail. This column suggests new methodologies that could form the basis for policies and regulation to address the too-connected-to-fail problem.
How should governments handle large and complex financial institutions that are “too big to fail” and “too connected to fail”?
Topics: Financial markets
Tags: currency crisis, exchange rate, foreign exchange, foreign exchange reserves, IMF, Too big to fail, too connected to fail