US bank regulation - Winners and losers of new finance law
Will this Gramm-Leach-Bliley legislation result in more "too big to fail" or "too big to disappear" institutions? If so, how should regulators respond?
I tend to be very skeptical about "too big to fail" arguments. I personally don't believe that any institution ought to be viewed as too big to fail. You need to understand that what's generally meant by "too big to fail", at least in the context of domestic depositary institutions, is that uninsured creditors of a failed bank will not be wiped out. They will be taken out at 100 cents on the dollar. The alternative would be allowing an ordinary insolvency to go forward with the uninsured claimants getting whatever assets the institution provided.
Hawke: banks have to develop non-interest income |
"Too big to fail" doesn't necessarily mean claimants shouldn't take a hit in an insolvency. In the past, the question whether an institution should be allowed to fail under circumstances where some creditors would take a loss has generally come up on the eve of insolvency, when there wasn't time to condition the expectations of those creditors.