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Tags: Rizzi | banks | fail | living wills

DePaul's Rizzi: Taxpayers Will Again Rescue Failing Big Banks

By    |   Tuesday, 09 September 2014 02:55 PM

The Dodd-Frank Act has failed to solve the too-big-to-fail problem, and some of the best solutions, like breaking up the big banks, are also the most unlikely, argues a banking industry expert.

Unless there are real changes, taxpayers will again bail out banks, predicts banking industry consultant and investor J.V. Rizzi in an op-ed for American Banker.

"The big bank model failed in late 2008; in a free market, these banks would have ceased to exist," writes Rizzi, an instructor at DePaul University Chicago. "They survived because they are the creations of the government, not the free market. Exempt from market discipline, they represent crony capitalism at its worst."

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The Dodd-Frank Act requires systemically important financial institutions (SIFIs) to create living wills detailing how they will be dismantled if they fail. That's supposed to prevent more taxpayer-financed bailouts. Unfortunately, regulators rejected 11 large banks' living will proposals.

Some say the plans will improve over time, Rizzi notes. "However, the truth is that living wills are a myth meant to calm the populace. It is impossible to neatly unwind a failed SIFI, since the failure of such a large institution will necessarily cause unacceptable collateral damage."

Rizzi offers several ways to solve the too-big-to-fail problem.

"Unfortunately, some of the most promising options are also among the most unlikely," he laments.

For instance, mega-banks could shrink themselves to safer, less complex entities. Not likely. Big banks want to keep their implicit government support and benefits of their size.

The banks could substantially increase their equity capital levels. However, that would reduce the benefits of being big, and banks resist the idea.

Rizzo favors reducing the size of the big banks so they would be small enough to fail by ring-fencing some business lines and spinning off others. Regrettably the banks would surely oppose the plan, he adds.

Another possible solution is to transform banks into government-sponsored entities like Fannie Mae and Freddie Mac. They might be better managed, he says.

"While this may be wishful thinking, such an approach would at least recognize the issue of SIFIs as a political problem that requires a political solution."

Regulators gave banks until next July to fix their living wills, notes Richard Scamehorn, Ohio University’s executive-in-residence emeritus in an article for the Lancaster Eagle-Gazette. "Unfortunately, by next July, these banks will be bigger than ever."

Scamehorn calls on Wall Street to "step up to the plate. Their business is making money — mostly by using someone else's money — by taking a degree of risk. But the degree of risk is now even more outsized as they become even more overloaded in speculative derivative transactions."

Editor's Note: Seniors Scoop Up Unclaimed $20,500 Checks? (See if You qualify)

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Finance
The Dodd-Frank Act has failed to solve the too-big-to-fail problem, and some of the best solutions, like breaking up the big banks, are also the most unlikely, argues a banking industry expert.
Rizzi, banks, fail, living wills
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2014-55-09
Tuesday, 09 September 2014 02:55 PM
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