Financial Regulatory Forum

Ending the era of bank bailouts

The following is a guest post by Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University School of Law, and a former assistant general counsel to the Federal Reserve Board of Governors. The opinions expressed are his own.

As Scott Brown and Barney Frank hash out the difference between a tax and an insurance premium, it’s important to return to the very basics of banking. Banks are in the business of buying and selling money.

They buy money as deposits and other borrowings. They sell it as loans and investments. If someone with deep pockets is foolish enough to guarantee a bank’s deposits and borrowings, that bank can buy money more cheaply. Further, if that person gives his guarantee for free, the bank would have a competitive advantage.

If I told you that an elite class of banks has found such a fool to guarantee their debts, you’d probably want to know who it is. Well, it’s you and me, the taxpayers.

Then you’d want to identify the elite banks so that we could cut off the guarantee, or at least begin charging them for what we’re giving away. Does “too big to fail” ring a bell?

UK must erase taxpayer subsidy for banks – minister

By Matt Falloon

LONDON, March 8 (Reuters) – Britain wants to remove the implicit taxpayer subsidy to banks but must not be left alone in clamping down on the financial sector, financial services minister Paul Myners said on Monday.

In a speech to bankers in London, Myners said there was a risk that high-flying financiers had not learned their lesson from the financial crisis and stringent reforms were needed to change behaviour.

Policymakers are increasingly mindful that improving economic conditions across the world may diminish the appetite to overhaul the financial system following the credit crisis.