Tags: BPC | bank | too big to fail | regulator

Bipartisan Policy Center Looks at Saving 'Too Big to Fail' Banks

By    |   Tuesday, 04 November 2014 07:48 AM

The Bipartisan Policy Center (BPC) held an event recently to question the movement in some quarters to cut bank on the size and powers of the biggest, riskiest banks in the hope of reducing the risk to the financial sector whenever another episode of the ongoing financial crisis occurs, as even defenders of administration policy and the Dodd-Frank Act acknowledge is virtually inevitable. This article provides some highlights from remarks of panelists.

Aaron Klein, director of the financial regulatory reform initiative at BPC, introduced the program and described it as a look at "the costs and benefits of having large, complex financial institutions." He also announced the release of BPC's white paper on the issue, titled "The Big Bank Theory: Breaking Down the Breakup Arguments."

Klein summarized the work of the group so far in issuing six reports, the first five on aspects of the Dodd-Frank Act. He spoke of a debate between advocates and opponents of big banks from both the right and left, and he predicted that whoever controls the next Congress would probably revisit this issue.

The moderator of the event was Neil Irwin, senior economics correspondent for The New York Times. Irwin expressed surprise that the term "too big to fail" still resonates after the 2008 episode, but that in itself might be a surprise, because the debate has been going on for decades. He suggested that there hasn't been enough consideration of what the world would look like without these banks.

Irwin invited Doug Elliott of The Brookings Institution, one of the authors of the paper, to discuss how far the economy has come in ending too big to fail. Elliott argued that Dodd-Frank and the Basel III capital regime will take the financial system "two-thirds of where we ought to be" once they're implemented. He then shifted to vociferous expression of his view, embodied in the report, that the biggest banks should not be broken up for three reasons: 1) that proponents of a breakup underestimate the societal benefits the large banks provide; 2) opponents exaggerate the reduction of risk to the financial system that might result; and 3) there would be significant transition costs that have hardly been discussed.

In rebuttal to Elliott, Marcus Stanley, policy director of Americans for Financial Reform, argued that the BPC report gives too much credit to the resolution authority enacted by Dodd-Frank, which Stanley contends is little more than "a plan to have a plan," to be fleshed out at the upcoming G-20 summit, which would then have to be implemented.

Therefore, Stanley thinks regulators tend to exercise forbearance regarding the risks big banks pose, because the regulatory system is not equipped to manage a massive failure.

Another panelist, Arnold Kling, an adjunct scholar at the Cato Institute, made this one of the tests he would apply to determine when too big to fail has ended, namely when regulators no longer "wet their pants" at the mere thought of such a failure.

Irwin asked Phil Swagel, a professor of international economics at the University of Maryland who was part of the Paulson Treasury that implemented Troubled Asset Relief Plan, to comment on the political influence the largest banks have over regulatory policy in Washington. He repeated the finding of the report that there are benefits to very large financial institutions, and he expressed vague, unconvincing hope that regulators would perform better in the next financial crisis than they have in past crises.

Kling reviewed the history of past crises and pointed out that each crisis, going back to Continental Illinois and the savings and loan crises is bigger than the last.

This writer has warned the entire time that nothing has ever changed, the risk grows ever larger and the industry will fight any measures designed to prevent the largest banks from blowing up the U.S. and world economies. The very first step toward reform would be to stop listening to voices that argue for repeating past behavior, not as an example of insanity, but because the results have been so good.

(Archived video and a copy of the report can be found here.)

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The Bipartisan Policy Center (BPC) held an event recently to question the movement in some quarters to cut bank on the size and powers of the biggest, riskiest banks.
BPC, bank, too big to fail, regulator
Tuesday, 04 November 2014 07:48 AM
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