TOO-BIG-TO-FAIL STILL 'TOO-BIG-TO-FAIL"?
Caveat Emptor. It seems the old latin byword is more poignant today than at any other time.
In 2010 the Dodd-Frank act was passed to try to curtail the size of banking institutions, in an attempt to avert the too-big-to-fail quandary that nearly took the banking sector down in 2008.
However, some of the banking institutions that were bailed out because their failure would have meant the collapse of the financial system are bigger today than they were before Dodd-Frank. Some of these are JPMorgan Chase, Bank of America, and Wells Fargo, heightening the risk of economic damage if they get into trouble.
Some legislators are trying to propose annexing to Dodd-Frank legislation that would cap bank size and limit non deposit liabilities. One of the item under scrutiny is the ability to borrow at a lower cost by bank that exceed 500 billion dollars in assets thanks to federal deposit insurance, which gives investors in the banking institutions the perception that the banks will be rescued in troubled times.
Some are calling for an end to the government's bailout inclusion of banks that are also investment banking institution. This would raise the borrowing cost of high risk taking businesses however, making the US companies less competitive.
One of the things that is being looked at, by no less than the more traditional banking giant Deutsche BankAG and Credit Agricole, is to force the riskier activities outside of traditional banking, so that if the investment part of the bank fails, the traditional banking portion does not have to be rescued and its cost borne by tax payers.
Another proposal, made by a US legislator, calls for the government to compile yearly lists of banks that have become too-big-to-fail and then break up slowly in the coming year.
Source: Bloomberg news 2.3.13
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