The 2008 financial crisis has pushed the world economy on the brink of collapse and revealed major flaws in the financial system. Four years later, most observers agree makers whiffed on addressing one of the main causes of the crisis: the difficulty of dealing with financial institutions if they are considered important – by regulators, the street and the businesses themselves – as “too big to fail”
“The institutions too big to fail that amplified and extended by the recent financial crisis remain an obstacle to full economic recovery in the very ideal of American capitalism,” the Dallas Fed Richard Fisher wrote the president last week. “It is imperative that we end up too big to fail. In my opinion, the downsizing of mastodons over time in the institutions that can be prudently managed and regulated across borders is the only appropriate policy response. “
Fisher comments prefaced the annual report of the Dallas Fed, entitled Choosing the Road to Prosperity: Why we must stop Too Big to Fail – Now, who notes (among other things) that the five largest institutions of control over half of the U.S. assets of the banking sector and the top 10 account for 61% of commercial banking assets as against 26% 20 years ago.
In addition, the report argues that the legislation Dodd-Frank financial reform “may actually perpetuate an already dangerous trend of increasing concentration of the banking industry.”
In the accompanying video, I discuss the “too big to fail” problem with James R. Barth senior fellow at the Milken Institute and co-author of a new Guardians of Finance: Making regulators work for us.
The big banks? No Problem
Although Barth agrees with the Dallas Fed on the Dodd-Frank is a wrong answer to the crisis of 2008, he comes to a very different conclusion when it comes to the issue of “too big to fail “.
“The problem is not size per se. Big banks are not really the problem,” said Barth. “The problem is excessively risky activities in which banks are banks that operate with too little capital.”
Indeed, there are strong arguments to present the 2004 “Bear Stearns rule” – that exempted businesses with a market capitalization greater than $ 5 billion of cap rules to leverage 12 to 1 – was greater Because of the financial crisis that the repeal of Glass-Steagall Act in 1999, which triggered a huge wave of industry consolidation and the rise of mega-corporations.
Barth, former chief economist of the Office of Thrift Supervision, also argues the real cause of the 2008 crisis was a failure of regulators, not the size of banks.
“If the regulatory authorities would do their job and make sure that banks do not engage in excessively risky activities and operate with sufficient capital so we would not have had a serious problem as we did only few years ago, “he said.
Barth certainly has a point, but there is a fundamental flaw in this logic: allow banks to grow so large, first raised their resources and power necessary to “capture” regulators and win the passage of industry-friendly reforms, such as repeal of the Glass-Steagall Act, and lobbying to prevent Dodd-Frank to be more restrictive on the banking sector.