No Bank is too Big to Fail Claims FDIC's Bair

notoriouslyconservative.com ^ | 05 06 09 | Notoriously Conservative

[Notoriously Conservative]

FDIC's Bair Questions Need for Large, Complex Financial Firms

Ms. Bair, who as protector of the nation's deposits has been at the fore of government efforts to deal with the financial crisis, questioned the need for firms considered "too big to fail." Instead, she said, the U.S. needs to have a system where one firm can be allowed to fail without the entire system breaking down.

That has been the key issue for policy makers trying to stabilize the U.S. banking system. Government policy has been to not let any of the major banking institutions collapse because of the potential follow-on effects to other institutions.

Ms. Bair said larger, more complex firms should face additional capital charges, restrictions on leverage and new risk-based premiums as a way to discourage aggressive growth and complexity.

"When a financial system includes a small number of very large, complex organizations, the system cannot be well-diversified," Ms. Bair said.

She also used the opportunity to take a swipe at the Basel II international capital framework regulators from around the globe had been working on before the current financial tumult occurred.

"In hindsight, it is now clear that the international regulatory community over-estimated the risk mitigation benefits of diversification and risk management when they set minimum regulatory capital requirements for large, complex financial institutions," Ms. Bair said

FDIC's Bair: No bank is too big to fail

Speaking at a luncheon sponsored by the Economic Club of New York Monday, the industry's top regulator said that the lack of such a mechanism has sustained the belief that some financial institutions are just simply "too big to fail" - a notion she said must be done away with.

"We need an effective resolution mechanism, not a get-out-of-jail free card," Bair said, speaking to an audience that included many high-profile members of the financial services community.

"The sooner we modernize our resolution structure, the sooner we can end too big to fail."

Now while I don't support the idea of the Government telling a private bank how large it can be, she does have a good point. At what point does size become a hindrance? Furthermore, if it brings and end to more government interference, i.e., too big to fail, then it is certainly an idea that should be explored. One government interference to end future government interference on a larger scale, seems like an example of the ends justifying the means.

[Notoriously Conservative]

http://www.notoriouslyconservative.com/2009/05/no-bank-is-too-big-to-fail.html

[Ev Reeman]

NO MORE !@#$%^&*! BAILOUTS!

[Attention Surplus Disorder]

Classic doublespeak. This isn’t a decision of either the free market or Congress. It’s a decision of the banks that own Washington. It’s like a student who grades his own papers. Ponder, but only briefly, the chances of a major money-center bank failing under these conditions. Any divergence from zero is a rounding error.

[Terabitten]

Sheer size isn't the problem. If a bank has $100b in assets, but they're properly diversified into reasonable investments, it's no big deal. Conversely, if a bank has $50b in financial Rube Goldberg investments, it's a problem.

Of course, that presupposes that the financial ratings are honest. If an investment is rated AAA, but it's really a D, then we have the same problem, but no one realizes it until it's too late.

[Vaduz]

Government interference = Obama

[TBP]

Oops.