Too Big 2.0 Fail
Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.
Three top banking officials told Congress today that America’s biggest banks are still seen as too big to fail. Appearing before the House Financial Services Committee, Richard Fisher, president of the Dallas Fed; Thomas Hoenig, the FDIC’s vice chairman, and Jeffrey Lacker, president of the Richmond Fed, all argued that big US banks benefit from a market subsidy based on the perception they’d be rescued by the government in a crisis.
The too big to fail issue was supposed to be solved by the 2010 Dodd-Frank legislation — indeed, President Obama has taken a “never again” stance on bank bailouts. Still, there’s been a mini-chorus of late that isn’t quite so sure. Last week Philadelphia Fed president Charles Plosser said the Dodd-Frank rules come up short (his solution: more bank capital). Sheila Bair, the former head of the FDIC, was a bit more positive in her congressional testimony today, suggesting that regulators need to simply finish the rules. Ben Bernanke said in May that too big to fail “must end,” but that “we’re moving in the right direction.”
Both Lloyd Blankfein and Jamie Dimon have suggested their banks can already be wound down without a cost to taxpayers. In apparent response to a Bloomberg report that found big banks enjoy a taxpayer subsidy worth $83 billion a year, Goldman Sachs put out its own report and found that a slight pre-crisis funding advantage for big banks has turned into a funding disadvantage. Harvard Law School’s Mark Roe, however, points out that Goldman’s study doesn’t look at banks’ short-term debt.
Meanwhile, the FDIC’s “complexity czar” has his own problem with America’s big banks: they don’t have workable plans to wind themselves down in bankruptcy. Bloomberg reports that the FDIC’s Jim Wigand isn’t happy with the first drafts of the “living wills” filed by the 11 biggest U.S. banks. Big banks have until October to submit new living will drafts. If they don’t get their affairs in order, banking consultant Karen Shaw Petrou tells Bloomberg, one or more big banks will “likely to be required to restructure.” This is not a new threat: in February the FT reported that not only might banks be required to hold more capital for having shoddy living wills — they could even be broken up. — Ryan McCarthy
On to today’s links: