Counterparties: Is your bank too big to fail?
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The Financial Stability Board (FSB), the group that tries to coordinate global bank regulation, yesterday released its annual list of â€śsystemically important financial institutionsâ€ť — the 28 banks which really are too big to fail. According to the NYTâ€™s Peter Eavis, itâ€™s the â€ślist that big banks donâ€™t wish to be onâ€ť. And it will be very familiar to Americans:
Eight are from the United States: Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and Wells Fargo. The list has its own hierarchy, with the banks split into four buckets. In the top bucket are Citigroup and JPMorgan, along with Deutsche Bank and HSBC.
As Eavis implies, being at the top of this list is not something to be celebrated. Banks in the top bucket face a 2.5% capital surcharge on top of the standard 7% rate that Basel III requires. Banks in the lower buckets face surcharges ranging from two to one percent. These regulations wonâ€™t be fully in force until 2019, so thereâ€™s plenty of time if you, like Deutsche Bank, donâ€™t currently have the requisite capital.
As the phrase implies, being too-big-to-fail isnâ€™t on balance a bad thing: as Steve Waldman notes, the biggest banks â€śget showered with loan guarantees, cheap public capital, and sneaky interventions to help them recover at the publicâ€™s expenseâ€ť. Thatâ€™s not fair to smaller institutions, and ends up distorting everyoneâ€™s economic incentives.
The Bank of Englandâ€™s Andrew Haldane recently said that there are no intrinsic economies of scale in banks bigger than $100 billion in assets. They do, however, enjoy lower borrowing costs, thanks to their implicit government guarantee. Which means that the bigger they get, the more support they enjoy. That should help ease the pain of those higher capital requirements. — Ben Walsh
On to todayâ€™s links: