Too Big 2.0 Fail
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Three top banking officials told Congress today that Americaâ€™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 FDICâ€™s Â 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 theyâ€™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 â€śnever againâ€ť stance on bank bailouts. Still, thereâ€™s been a mini-chorus of late that isnâ€™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 â€śmust end,â€ť but that â€śweâ€™re moving in the right direction.â€ť
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 Schoolâ€™s Mark Roe, however, points out that Goldmanâ€™s study doesnâ€™t look at banksâ€™ short-term debt.
Meanwhile, the FDICâ€™s â€ścomplexity czarâ€ť has his own problem with Americaâ€™s big banks: they donâ€™t have workable plans to wind themselves down in bankruptcy. Bloomberg reports that the FDICâ€™s Jim Wigand isnâ€™t happy with the first drafts of the â€śliving willsâ€ť filed by the 11 biggest U.S. banks. Big banks have until October to submit new living will drafts. If they donâ€™t get their affairs in order, banking consultant Karen Shaw Petrou tells Bloomberg, one or more big banks will â€ślikely to be required to restructure.â€ť 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 todayâ€™s links: