Counterparties: Is your bank too big to fail?

By Felix Salmon
November 2, 2012

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The Financial Stability Board (FSB), the group that tries to coordinate global bank regulation, yesterday released its annual list of “systemically important financial institutions” — the 28 banks which really are too big to fail. According to the NYT’s Peter Eavis, it’s the “list that big banks don’t wish to be on”. 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 won’t be fully in force until 2019, so there’s plenty of time if you, like Deutsche Bank, don’t currently have the requisite capital.

As the phrase implies, being too-big-to-fail isn’t on balance a bad thing: as Steve Waldman notes, the biggest banks “get showered with loan guarantees, cheap public capital, and sneaky interventions to help them recover at the public’s expense”. That’s not fair to smaller institutions, and ends up distorting everyone’s economic incentives.

The Bank of England’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 today’s links:

Dispersed States
Mexican drug cartels kidnap and enslave engineers to build secret radio network – Wired

Primary Sources
US economy adds 171,000 jobs in a reassuringly solid NFP report – BLS

#Sandy
Inside the mad hunt for gas on the East Coast – NYT
Should gas prices be soaring? – Felix

New Normal
The bad jobs news: “the gigantic, overlooked underclass of long-term unemployed workers” – Catherine Rampell

Hope/Change/Etc.
Meet the man in charge of securing Obama’s legacy (and possibly the next Treasury secretary) – National Journal

Truthiness
How to use the jobs report to make any case you want for Obama’s reelection chances – Quartz

Popular Myths
Being nice to business has nothing to do with delivering economic growth – Matt Yglesias

Wonks
“A bet is a tax on bullshit” – Alex Tabarrok

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