Neal Wolin and the Bankers: Where Are the Numbers?

By Simon Johnson

Deputy Treasury Secretary Neal Wolin addressed the Financial Services Roundtable today. His prepared remarks included the following key paragraphs:

“The days when being large and substantially interconnected could be cost-free – let alone carry implicit subsidies – should be over. The largest, most interconnected firms should face significantly higher capital and liquidity requirements.

“Those prudential requirements should be set with a view to offsetting any perception that size alone carries implicit benefits or subsidies. And they should be set at levels that compel firms to internalize the cost of the risks they impose on the financial system.

“Through tougher prudential regulation, we aim to give these firms a positive incentive to shrink, to reduce their leverage, their complexity, and their interconnectedness. And we aim to ensure that they have a far greater capacity to absorb losses when they make mistakes.

“…… Leading up to the recent crisis, the shock absorbers that are critical to preserving the stability of the financial system – capital, margin, and liquidity cushions in particular – were inadequate to withstand the force of the global recession.

“While the largest firms should face higher prudential requirements than other firms, standards need to be increased system-wide. We’ve proposed to raise capital and liquidity requirements for all banking firms and to raise capital charges on exposures between financial firms.”

There is nothing wrong with this statement of principles, although I would prefer a much blunter statement of “Too Big To Fail is Too Big To Exist.”

But where are the numbers? How much is the administration proposing to raise capital requirements, and how will these steepen as banks and other financial firms move into the “red zone” above $100bn total assets? Without specific figures on the table, it is simply impossible to evaluate whether this is a good proposal or window dressing.

Don’t tell me leading administration figures don’t have a view on the numbers – with the lobbyists and behind the scenes with journalists they are happy to provide more specific briefings, and you know that Treasury/Federal Reserve Board guidance or “input” into the regulatory process will have huge weight. And all the background information – including Treasury’s recent actions vis-à-vis big banks, this week and last – point in the same direction: window dressing.

Mr. Wolin, for your proposals to have credibility and to win support, you must answer the question: in the view of the administration, how much capital is “enough”?

Comments

[Harry Tuttle:]

It is much easier than that. Companies that fail, like AIG, C, and GM should be outright taken over and liquidated. No equity and no possibility of "earning your way back". Although not a perfect solution, it would go a long way to address moral hazard without the need to define what is "too big".

The problem is in the ambiguous definition of "failure". Debt failure causes contagion, orderly liquidation (FDIC style) does not.

Sep 25 08:33 AM