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Regulators are confused about whether to use capital buffers as a tool to stamp out "too big to fail" banks or as a cushion to protect the financial system from the next crisis. But the Dodd-Frank Act gives them a clear mandate: to eliminate market expectations of a government bailout.
February 4 -
The Basel Committee's revisions to banks' risk disclosure requirements should help investors glean more meaningful information, thereby allowing them to impose market discipline on less creditworthy institutions.
January 29 -
There are enough studies quantifying the subsidies that too-big-to-fail banks receive. The focus should now be on the other benefits that keep big banks too large to manage, supervise or even jail.
May 2 -
An obscure bill in the House would go a long way to protect taxpayers by giving megabanks an incentive to deleverage and shrink. So why has it gone nowhere?
March 27
Many of the largest banks in the U.S. have only grown bigger and more complex in the years since the financial crisis. Therefore claims that the country has made major strides toward ending "too big to fail," such as those voiced by The Clearing House Association president Paul Saltzman in a recent
The majority of the world's 30 largest banks are now larger than they were in 2006, as Stanford University finance and economics professor Anat Admati said at the World Economic Forum in Davos. Eight of these banks are headquartered in the U.S. Many of these banks, in their never-ending search for yield, have become more complex by increasing their repurchasing activities, investments in securitizations and derivatives transactions.
Banks can afford to do this because, unlike other "perfectly successful companies which fund themselves with plenty of equity, banks have a distorted business model which enables them, by being excessively leveraged, to pass more costs to others," as Admati told me Thursday.
Yet Saltzman's column contends that the public should be reassured by a recent Government Accountability Office study, which
Moreover, as I have written in these columns,
In addition, the implicit subsidy that big banks enjoy is cyclical. Right now, with the U.S. economy performing better than it has since the financial crisis, it is unsurprising that the perception of government bailouts may have decreased. But in the next downturn, market perception of a subsidy would reappear.
Saltzman highlights new regulatory capital and buffer requirements that are intended to take aim at TBTF. But most of these rules have yet to be implemented. We won't really know how well the rules work until they've taken effect, and many big banks are likely to struggle to implement them.
The column also says that banks are required to "
Banks'
Moreover, a significant majority of the world's biggest banks are unlikely to be able to meet important data aggregation
Saltzman also notes Dodd-Frank's orderly liquidation authority and the Financial Stability Board's total loss-absorbing capacity
The column also neglects to mention that U.S. regulators have found the living wills of 11 of the largest U.S. banks to be
Finally, it is important to point out the incredibly high level of operational risk that continues to plague TBTF banks as evidenced by the millions of dollars that banks have paid to settle accusations of manipulating interest rates, foreign exchange rates and commodity rates, as well as charges related to money laundering, terrorism financing and erroneous foreclosures. What part of this unethical behavior should lead us to believe that the biggest banks respect new regulations?
I would be remiss not to say that I do agree with one point Saltzman makes: indeed, "more needs to be done" to end TBTF.
Mayra Rodríguez Valladares is managing principal at