Something Is Being Done About the "Too Big to Fail" Problem
The near-collapse of the global financial sector in 2008 was our periodic reminder that banks that are “too big to fail” are a threat to the public. Now, seven years later, some action is being taken.
Today, the Financial Stability Board, an international financial regulatory body, released the hard numbers on how much new money banks are going to be required to set aside in order to (hopefully) be able to bail themselves out when the next financial crisis rolls around, rather than running to the public to bail them out—which has been a wonderful business model for banks historically, but which does tend to wear on the public’s patience.
The FSB’s requirements are a bit more arcane than just telling banks “have more money, in the bank,” but they amount to the same goal: create a pool of money to shore up teetering banks, and lay out exactly who should expect to lose money when banks go into crisis. In aggregate, the 30 most “systemically important” banks in the world will have to set aside an extra $1.2 trillion to serve as a safety net. Eight major U.S. banks on the list will be responsible for setting aside $120 billion.
Some regular people might ask: why not just require banks to hold more cash in case of emergency, rather than setting up this system of bonds which is too complicated for a blogger to even explain? And indeed, the Bloomberg editorial board asked the same thing: “How is this better than simply requiring banks to have more equity in the first place? Equity absorbs losses without requiring regulators to trigger bail-ins or strike cross-border agreements. Banks need more of it.”
I dunno. Do you? If so, please share in the comments.
In any case it is an encouraging sign that something rather than nothing is being done about Too Big to Fail, a dynamic that serves to socialize Wall Street losses even as their gains are privatized. If this doesn’t work, we can always just break up the banks.