Whither Megabank, Inc?
by Professor Bear
Should too-big-to-fail banks get special protection in the form of a free
(government-provided) ad hoc bailout insurance against failure?
Should a banker’s bonus be guaranteed, even if the bank he serves has lost
tens or hundreds of billions of dollars?
Does the banking system function better when it is overwhelmingly
dominated by banks so large and systemically important that they hold a
proverbial Sword of Damocles above the global economy’s head?
Has the financial sector grown so large relative to the rest of the
economy that it can no longer serve the common good?
A debate on the too-big-to-fail problem is radiating through the
international policy arena, and some interesting philosophical differences
are emerging. Below I offer some references to recent articles in the
Financial Times and other sources which highlight the growing divide among
national leaders on issues that will shape the future of international
banking for decades to come.
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The Financial Times
Brown pledges bonus clampdown
By Lionel Barber and Philip Stephens
Published: August 31 2009 23:35
Gordon Brown has pledged tough action to clamp down on excessive
remuneration for bankers as part of an international effort to rectify the
systemic weakness that led to the global financial crisis.
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The Financial Times
Berlin bids to halt ‘too big to fail’ banking
By Bertrand Benoit and Chris Bryant in Berlin
Published: August 31 2009 16:41
Germany is calling on the world’s largest economies to adopt joint
measures to prevent banks from becoming “too big to fail” and holding
governments to ransom in future financial crises.
Angela Merkel, Germany’s chancellor, said on Monday – following a meeting
in Berlin with President Nicolas Sarkozy of France – that steps to prevent
excessive risk-taking by large banks should rank high on the agenda of the
summit of the Group of 20 largest economies in Pittsburgh later this
month.
“No bank should be allowed to become so big that it can blackmail
governments,” Ms Merkel said.
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TOO BIG HAS FAILED (PDF). Thomas M. Hoenig. President and Chief Executive
Officer. Federal Reserve Bank of Kansas City. Omaha, Neb. March 6, 2009
(Quote passage starting with “What Might We Learn from Previous Financial
Crises?”)
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The Financial Times
Too much of a very good thing
Published: August 31 2009 19:17
The City of London is the most successful financial centre in modern
history, now well into its third century as a leading banking hub. In
2007, nearly 200 years after its funding power played a crucial role in
the defeat of Napoleonic France, it produced more than one quarter of all
British corporation tax revenues.
For the UK, a country which is rather self-conscious about its perceived
lack of world-beaters, this grand entrepot crowded against the Thames has
been a source of pride. Before the crisis, British politicians, for some
years, conducted elaborate liturgies of devotion before mighty finance,
humbly promising not to get in its way.
So, the view expressed by Lord Turner, chairman of the Financial Services
Authority, in an interview published last week that parts of the British
financial sector might be larger than is “socially optimal” is
uncomfortable. He is, however, right, and his intervention is symbolic of
the welcome change in attitude at the FSA since he took charge at the
supervisor.
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Has “too big” failed? If so, how best should it be fixed?
