Comments on: Putting an end to too-big-to-fail: An IM exchange http://blogs.reuters.com/felix-salmon/2009/06/18/putting-an-end-to-too-big-to-fail-an-im-exchange/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: Robin Joyce http://blogs.reuters.com/felix-salmon/2009/06/18/putting-an-end-to-too-big-to-fail-an-im-exchange/comment-page-1/#comment-2935 Fri, 19 Jun 2009 14:20:08 +0000 http://blogs.reuters.com/felix-salmon/2009/06/18/putting-an-end-to-too-big-to-fail-an-im-exchange/#comment-2935 Just in case you missed this proposal:

Banks should pay for their own bailouts
Banks should pay for their own bailouts. That’s the intriguing idea being floated by Paul Tucker, one of the Bank of England’s deputy governors.
http://www.telegraph.co.uk/finance/break ingviewscom/5436731/Banks-should-pay-for -their-own-bailouts.html
By Hugo Dixon 03 Jun 2009, Breakingviews.com
Published: 2:23PM BST
Not only would such a scheme protect taxpayers from the cost of banks’ future folly; it might even discourage banks from running into trouble in the first place.
The need for governments to rush to the help of banks every few decades seems to be an unfortunate fact of life. If the banking system is on the brink, it can’t be allowed to collapse. But the burden of paying for the bailout shouldn’t fall on the public purse.
This is where Tucker’s idea comes in. The banking industry could be told in advance that, if ever there was another crisis, the ultimate cost would come from banks themselves. In the midst of a crisis, that would not be possible. A government would have to pump in new equity. But when the dust had settled and the government had sold its shares, the loss (if any) could be calculated – and then collected from the industry via a levy.
Banks that didn’t get into trouble would no doubt scream that it was unfair to tap them to bail out their prodigal brethren. But it is certainly a lot less unfair than picking taxpayers’ pockets.
Of course, the first port of call should be the troubled bank itself.
Its shareholders – and ideally bondholders – should be squeezed before any of the more sensible banks have to pay up. But if a bank’s collapse is deemed to constitute a systemic threat, it is perfectly reasonable to ask the rest of the industry to contribute. After all, other banks are the primary beneficiaries if the system doesn’t collapse. The approach would be somewhat similar to the one used in many clearing houses: if one member defaults, there is a whip round other members to pay its debts.
What’s more, the knowledge that such a levy would be imposed might help stop banks running into trouble in the first place. Conservative banks would have a strong incentive to watch their racier brethren and report their behaviour to teacher.

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By: David3 http://blogs.reuters.com/felix-salmon/2009/06/18/putting-an-end-to-too-big-to-fail-an-im-exchange/comment-page-1/#comment-2903 Thu, 18 Jun 2009 16:21:06 +0000 http://blogs.reuters.com/felix-salmon/2009/06/18/putting-an-end-to-too-big-to-fail-an-im-exchange/#comment-2903 On a related note, a great paper, “Looting: The Economic Underworld of Bankruptcy for Profit” by George Akerlof and Paul Romer. Well worth the $5.

http://papers.ssrn.com/sol3/papers.cfm?a bstract_id=227162

Partial Abstract:

“Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society’s expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.”

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By: Don the libertarian Democrat http://blogs.reuters.com/felix-salmon/2009/06/18/putting-an-end-to-too-big-to-fail-an-im-exchange/comment-page-1/#comment-2901 Thu, 18 Jun 2009 16:04:44 +0000 http://blogs.reuters.com/felix-salmon/2009/06/18/putting-an-end-to-too-big-to-fail-an-im-exchange/#comment-2901 I still think that this is the best proposal so far:

http://blogs.ft.com/maverecon/2009/02/re gulating-the-new-financial-sector/

“17. The distinction between public utility banking/narrow banking vs. investment banking: (the rest) has to be re-introduced. I advocate a form of Glass-Steagall on steroids, with a heavily regulated and closely supervised narrow banking sector, engaged in commercial banking (taking deposits and making loans) and benefiting from LLR and MMLR support. The investment bank sector will also be regulated and supervised, but more lightly, and according to the same principles as other systemically important highly leveraged non-narrow bank institutions.

Universal banking has few if any efficiency advantages and many disadvantages. Economies of scale and scope and banking are soon exhausted. They tend to be fat to fail, have a lack of focus, and suffer from span-of-control negative synergies etc. Universal banks or financial supermarkets use their size to exploit market power and try to shelter their risky, non-narrow banking activities under the LLR and MMLR umbrella of the narrow bank that’s hiding somewhere inside the universal bank.

18. Splitting banks into public utility or narrow banks does not solve the problems of banks (narrow or investment) becoming too big or too interconnected to fail. It is therefore necessary to penalise bank size per se, to stop banks from becoming too large to fail (if they are interconnected but small, they are still not systemically important). I would penalise size through capital requirements that are progressive in size (as well as leverage).”

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