"Too big too fail" is a phrase that we have become all too familiar with here in the United States. Generally speaking, TBTF refers to an organization that is large and influential enough that its demise could (and would) cause a systemic problem throughout its sector and eventually the entire economy. See the Lehman Brothers collapse of 2008. Or talk to the Car Czar.
Since the 2008 crisis, lawmakers, thought experimenters, bloggers, and even people on WSO have taken stabs at "figuring out" TBTF.
Well, a joint-commission between the FDIC and the Bank of England may have done just that.
The paper from the Bank of England and the F.D.I.C. focused on one way to accomplish this. The relevant regulator would take control of the bank’s parent company, then embark on a restructuring. By saying they are focusing on the parent company, regulators hope to shape expectations in the market and minimize destabilizing uncertainty when a bank implodes. This approach, “will give greater predictability for market participants about how resolution authorities may approach a resolution,” the regulators wrote.
The meat and potatoes of this DealBook article revolves around a plan to restructure banks that are in trouble. This involves using the parent company's debt to correct balance sheet discrepancies following a meltdown.
The article mentions that restructuring using long-term debt is not always tenable -- in the example they give, JP Morgan Chase Bank has long-term debt $116 billion and the banks overall assets are $2.3 trillion. One would imagine that following a meltdown, the balance sheet would not need to be restored to entirely "healthy status" (i.e. the $2.3 trillion), but to a point that allows the bank to function and "get back up on its feet", as it were.
One of the more sensible ways of combating TBTF is to require banks to separate securities divisions from other banking operations (commercial, etc.) so that banks are no longer "too big" and wouldn't cause absolute destruction to the financial system if they made mistakes. This was something I saw many users espousing in the aftermath of the JP Morgan trading scandals earlier this summer.
Anyway monkeys, what do you make of this new plan from the FDIC and Bank of England? Is it an end to TBTF? If not, how do we combat it?
Thanks for reading.
Full paper for those that are interested.
It's nice to see that they're making an attempt to correct the absurdity that is "too big to fail". What's worrying though, is that the FDIC (and probably the BofE, too) has always had the power to put insolvent banks into receivership (though not from the parent company level), it's just rarely used. Since 2000, fewer than 500 banks have failed, and somehow only 25 failed in 2008 out of 7,087. It all just seems a little weird to me, but in short, step in the right direction.
Is TBTF a kneejerk reaction? There are plenty of other companies that are TBTF, but have no contingency plans set in by the state to replace them. Speaking from the UK perspective, what would we do if Tesco closed? Or BT or BP?
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