Is Too Big to Fail Now Too Big to Exist?

Everyone seems to realize at last that banks that are too big to fail are also too big to manage--and too big to exist. Even the Feds understand this now, and are grasping for a solution.

To me, the answer is simple: impose higher capital requirements on banks with more than $100 billion in assets, to reflect the heightened risk such mega-institutions pose to the system. That way, the market, not regulators, could decide if the increased size is worth the attendant extra risk and capital.

I can't imagine a simpler, more logical solution. Yet now the Treasury is out with a different proposal: it proposes that if any of big bank or broker fails, banks with assets above $10 billion be assessed a resolution fee, over and above their regular FDIC premiums.

Now there's a great idea. Assess every regional bank in the country to pay for the reckless risk-taking of Citigroup (C), Bank of America (BAC), Goldman Sachs (GS), and the rest. Penalize the banks that provide credit to Main Street America to offset the New York casino culture.

Citi has effectively failed. So has BofA. Goldman would be out of business, as well, if it weren't for the emergency relief the government provided it. It's not the taxpayer's job (or the job of the U.S. banking system, for that matter) to reward the failures of the mega-institutions, or enable their irresponsible risk culture.

If the government can't effectively control these banks (and recent history shows that it can't) let the market do so by dramatically raising their capital requirements.

Comments

[commoinsens...:]

amen brother...

Nov 03 11:11 AM

[Jim P. Smith:]

I couldn't agree more with the additional reserve requirement idea. That is an EXCELLENT solution. Two thumbs up.

Nov 03 11:28 AM

[BIG-MONEY:]

CITIBANK HAS INDEED FAILED. CITIBANK has been built on lies and fraud. CITIBANK HAS NO BUSINESS BEING IN BUSINESS. Citibank is done in 2009. CITIBANK RIP...............

Nov 03 12:12 PM

[fizzicyst:]

"I can't imagine a simpler, more logical solution." ---- Well I can. I see no advantage to the nation of having such mega-banks, but a big disadvantage; that is, the need for major government action -- hugely expensive, not effective at curing the basic problem, too bureaucratic, etc., etc.

So, the simplest, most logical solution is: break them up into pieces, each of which is small enough to be allowed to fail !

Nov 03 12:26 PM

[yomamma:]

US banks are not just competing against each other but against global competitors. If you want to see US banking go the way of US manufacturing shrink them. Excessive risk taking is the problem not asset size.

Nov 03 01:19 PM

[Howard_T:]

I say break them up into their constituent parts, banking, brokerage, etc. While you're at it, likewise break up the entire industry. I think this was once called "Glass-Steagle". This will force the largest of the banks to compete on a more even footing with the smaller regional banks, and should result in more money getting into the hands of businesses in the form of loans.

If the mega-banks are not broken up, remember this: Even Tyrannosaurus Rex was too big to fail, and we all know what happened to the dinosaurs.

Nov 03 01:23 PM

[yomamma:]

There's also a problem with huge market manipulation in individual markets eg. commodities, CDS by certain large players.


On Nov 03 01:19 PM yomamma wrote:

> US banks are not just competing against each other but against global
> competitors. If you want to see US banking go the way of US manufacturing
> shrink them. Excessive risk taking is the problem not asset size.

Nov 03 01:28 PM

[fwi:]

I agree, and would add one more requirement. All securitizations that are originated by the TBTF bank would be capitalized with a cap of 10 to 1 leverage.. I believe it is now around 30 to 1 (if that is to be believed) This lowered leverage would act as a natural deterrent , and the proliferation of these risky instruments throughout the system.

Not outlawed, not government by fiat. Just the idea that if you want to take the risk, and enjoy the reward, you also take the punishment of failure if it doesn't work out.

Nov 03 04:16 PM

[Dr. Acula:]

"I can't imagine a simpler, more logical solution." - How about outlawing bailment fraud and criminal Ponzi schemes (so-called "fractional reserve banking")? "the answer is simple: impose higher capital requirements " - Oh, I see, the idea is to allow the fraud as long as it is not too large.

Nov 03 04:29 PM

[lwa:]

easy solution
don't allow any jews to be bankers. probles solved overnight.

Nov 03 04:54 PM

[wippster:]

It looks like slight of hand. Make it look as though maintaining higher reserves is worse than paying out penalties. If all large institutions paid fees for failures, they would all be each others big brother. One would turn the other one in for discrepancies. All penalties would be real not an imaginary " you will have to hang onto your money longer."

Nov 03 06:32 PM

[RE Broker:]

Why have a simple solution when Timmy the Tax Cheat can come up with a complex "solution" that punishes the honest and prudent.

Nov 03 08:04 PM

[greedcanbgood:]

Once again, I challenge the “break them up” proponents to explain just how this should be done. What metric will you use? Will you (or the administration) ever be able to reach a consensus? Are you willing then to apply those same metrics to other organizations (i.e. Microsoft and Walmart) in case they are “too big” also? The dangerous precedent is permitting the government to make decisions with regard to the business model of a private organization.

I agree with an earlier poster, size is not the problem, excessive risk taking is. Measures to limit the amount or risk a bank takes on might be an appropriate solution but the bottom line is that the government is unwilling to go that route because it will return banks to the very conservative nature they had in decades past. Home buyers will HAVE to again come up with a 20% down-stroke. To qualify for a mortgage you will again have to meet the old standby 28/35 rule and people will again have to work hard to achieve home ownership. Not to mention what it will do to business and commercial lending…

Nov 04 10:52 AM