We Can Prevent “too big to fail”
Andrew Redleaf and Richard Vigilante Call for Clarity, Full Disclosure and Raised Capital Requirements
Wall Street Journal today reports, “President Barack Obama on Thursday is expected to propose new limits on the size and risk taken by the country’s biggest banks, marking the administration’s latest assault on Wall Street in what could mark a return, at least in spirit, to some of the curbs on finance put in place during the Great Depression, according to congressional sources and administration officials.”
Andrew Redleaf and Richard Vigilante react:
We don’t know what the President will propose in regard to limiting the size and scope of federal banks, but here’s hoping he at least goes for simple rules, embodied in black letter law, rather than “regulatory discretion.”
The mega banks reached their current size largely because they were able to borrow at below market rates from bond holders who believed—rightly–the banks were under government protection. That subsidy amounted to many billions a year and in many years was responsible for most or all of the mega-banks’ profits.
The most effective fix for too-big-to-fail is to raise capital requirements for very large banks sufficiently to erase the too big to fail subsidy. Doubling the current six percent of assets rule would not be excessive. Not only would this curb the size of the mega banks it would also make them far less likely to fail, thus attacking “too big to fail” from both sides.
As for the scope of what banks are allowed to do, the best way to restore the “spirit of Glass-Steagal” is to let the people enforce it. Disclosure in the financial sector is horrible, mostly because the regulators actively encourage secrecy, or in the case of really top regulators like Secretaries of the Treasury, actual deception. Require every financial institution with more than $10 billion in assets to disclose every detail of their balance sheets (and off-balance sheet entanglements): every investment, every security held or traded, right down to the CUSIP number of the bonds they own and the addresses of the properties held through their mortgage backed securities. Then let bondholders and depositors decide whether the banks have strayed too far afield. Had such a policy been in place the mortgage crisis would never have happened.
Tags: finance, President Obama, redleaf, Regulation, vigilante, WSJ
