Tags: Fed | bank | Dodd-Frank | plans

Banks Still Vulnerable to Crisis Collapse

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Wednesday, 13 Aug 2014 08:27 AM Current | Bio | Archive

Modern banking is a giant confidence game. Banks accept cash from depositors, then lend the money to borrowers, while simultaneously promising the depositor instant access to their cash. This would be fraud in any other context. For banks, it's routine business.

Our banking system is essentially a giant bet that only a few depositors will withdraw their cash on any given day. The Federal Reserve's lending window can cover this, but the entire pyramid scheme could still collapse if enough depositors ever lose confidence in it.

This is why banks talk so much about their "financial strength" and "fortress balance sheets." They really need you to believe it — and the less stable they are, the more they need everyone to think the opposite.

Last week, the Fed and the FDIC issued a joint statement on the "living wills" that top banks must file under the Dodd-Frank financial reform act. These resolution plans are supposed to prevent another disorderly collapse like happened to Lehman Brothers in 2008.

These are the plans about which Fed Chair Janet Yellen seemed clueless in Congressional testimony last month. She did some quick homework, apparently. The Fed-FDIC statement accused the banks of "failure to make, or even to identify, the kinds of changes in firm structure and practices necessary to enhance the prospects for orderly resolution."

The two agencies sent individual letters to the 11 affected institutions, which include Bank of America (BAC), JPMorgan Chase (JPM), Goldman Sachs (GS) and Morgan Stanley (MS), detailing specific problems to address in new plans due by July 2015.

FDIC Vice Chair Thomas Hoenig was particularly blunt. "Despite the thousands of pages of material these firms submitted, the plans provide no credible or clear path through bankruptcy that doesn't require unrealistic assumptions and direct or indirect public support," Hoenig said in a statement.

Let's cut to the chase. After four years, the megabanks still cannot demonstrate that their continued existence is not a threat to the economy. They are "too big to fail."

Even worse, the agencies charged with controlling this risk seem content to kick the can down the road one more time. Will the 2015 plans be any better? No one knows. What we do know is that the economy — and taxpayers — will stay exposed to intolerable risks for at least another year.

Meanwhile, the global banking system faces serious stress. Portugal's Banco Espirito Santo just collapsed, forcing the nation's central bank to stage a $6.6 billion bailout. South Africa's Reserve Bank is doing the same for subprime lender African Bank Investments Ltd. And rumors are swirling about Italian banks.

Dodd-Frank is supposed to protect the public from another panic-induced recession. We may find out the hard way that it didn't do the trick.

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PatrickWatson
Modern banking is a giant confidence game. Banks accept cash from depositors, then lend the money to borrowers, while simultaneously promising the depositor instant access to their cash. This would be fraud in any other context. For banks, it's routine business.
Fed, bank, Dodd-Frank, plans
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2014-27-13
Wednesday, 13 Aug 2014 08:27 AM
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