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The Clearing House spent 10 months and $2 million to plan a simulation of a large bank failure — and the results are not only fascinating, they're exemplary.
December 19 -
With President Obama re-elected and Senate Democrats in the legislative driver's seat, the Dodd-Frank Act is here to stay.
November 14 -
Why a common tax strategy is about to get much more complex for global banks.
November 1 -
A private-sector analysis of the implementation of the Dodd-Frank resolution facility outlines several tasks the FDIC needs to complete before it's ready for the next crisis.
October 24
The speculation about what to expect in a second Obama term has overlooked one obvious possibility: another financial crisis.
According to JPMorgan Chase CEO Jamie Dimon, financial crises
Rather than rely on insured deposits for financing, the biggest financial institutions now rely increasingly on the largely unregulated shadow banking system. The sheer size of shadow banking — $67 trillion, according to the Financial Stability Board — may create "a need for sudden payouts [that] could also prompt a run on a financial institution," Cowen says. "It now seems that the 21st century will resemble the 19th and early 20th centuries, with periodic panics and runs on financial institutions, perhaps followed by deflationary collapses."
All of this makes banking regulators' nonchalance about preparing for a crisis puzzling.
The Dodd-Frank Act did not break up the biggest banks into small-enough-to-fail institutions or end their reliance on shadow bank borrowing. Instead, the Act provides an "orderly resolution authority" so regulators can dismantle failing institutions without catastrophic consequences for the financial system or for the real economy.
The Act requires the largest institutions
The biggest banks submitted their first living wills this summer. William Dudley, the president of the Federal Reserve Bank of New York, recently
Simon Johnson, former chief economist for the International Monetary Fund,
Dudley said that the "current approach" of regulators is to reduce the likelihood that the biggest institutions might fail by requiring frequent stress tests, increased capital and liquidity buffers, and reforms to shadow banking and derivatives markets. "The bad news is that some of these efforts are just in their nascent stages," Dudley said.
The "blunter approach" of breaking up the biggest banks "may yet prove necessary," Dudley said, but it is "premature to give up on the current approach."
The "negative externalities" of the last crisis, to use Dudley's phrase, were widespread, long-term unemployment and underemployment; declining wages; the loss of decades of wealth accumulation by most families; and frightening rage that may be incompatible with enduring, stable democracy. A trial and error approach to regulation really should not be an option.
Megabanks have many incentives to remain too big to fail. They apparently enjoy immunity from criminal prosecution, even for "epic" rigging of the world's benchmark interest rates to defraud counterparties to interest rate derivatives, and for money laundering for terrorists, genocidal regimes and drug cartels. The "implicit government guarantee" provides almost unlimited liquidity for every line of business and allows megabanks to borrow more cheaply than smaller competitors. Megabanks will not voluntarily become small enough or simple enough to fail.
In fact, the most obvious impediments to orderly resolution appear intentional. The seven largest banks have
The Dodd-Frank Act did not give regulators the choice of taking measures to make a panic less likely or planning for a panic. Banking regulators should act with urgency to require that living wills be credible plans to resolve failing firms without the "negative externalities" of the last crisis. Banking regulators should not wait for a protracted "iterative process" to remove obvious impediments to orderly resolution.
Rep. Brad Miller, D-N.C., is retiring after 10 years in the House.