Farewell to too big to fail
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The era of too big to fail is over, according to the Government Accountability Office. The GAO studied whether big big banks had lower funding costs because of an implicit expectation that the government would bail them out during a crisis. Their answer was yes and no: yes, a too big to fail (TBTF) subsidy did exist during the financial crisis; and no, it no longer exists.
Paul Krugman hails the finding and calls financial reform, as well as health care, one of the two big victories of the Obama administration. They key on TBTF, says Krugman, is Dodd-Frank’s Orderly Liquidation Authority, which gives the government the power to seize and wind down failing banks. Crucially, “financial markets are now acting as if they believe that future bailouts won’t be as favorable to fat cats as the bailouts of 2008.”
You may remember that last year, Jeremy Stein, then the Federal Reserve’s guru on unwinding failing banks, said there absolutely was still a TBTF subsidy. Bloomberg View’s editors quantified it at $83 billion annually. Goldman Sachs disagreed, and said being a TBTF bank actually cost $10 billion a year.
Mike Konczal is glad to put talk of “permanent bailouts” and endless quibbling over their exact cost behind us. The goal of regulation, he says, should not be to “fine-tune” the subsidy received or not by banks: “The subsidy is only a symptom of much larger problems with the financial system, and the point of regulation is to build a system that works.” And we are not, he says, there yet. The rules for how to actually liquidate a failed bank are still being written.
Matt Levine looks at the GAO report and thinks that what we are actually seeing in increased funding costs for big banks is an insurance payment. “You pay a premium every month, and it pays off when things go bad… It looks like a bad deal in good times, but a good deal in bad times.” The good news is that banks are now more well-capitalized, and well-capitalized banks tend to make a financial crisis less likely. — Ben Walsh
On to today’s links: