William Armstrong

The Debate over Banking Reform, Part 2

I fully agree. The TBTF box is not a home. It is a place where a financial institution would go temporarily where the authorities could keep a good eye on it while it takes actions to reduce its size and riskiness. If it is so far gone that it cannot be rehabilitated, then the box is a place to conduct an orderly liquidation.

Once the rules of the regulatory regime that I describe are applied and understood, I believe that very few institutions would end up tripping the wire to be declared TBTF, since the consequences of going to the penalty box would substantially wipe out the shareholders.

The Debate over Banking Reform

While it is possible that some "trust-busting" will be necessary I don't think overt size is the problem now. Remember, the de-leveraging is for real. Financial institutions have fewer risks on their books (and, importantly, off their books) than before and they may have fallen in size below the threshold of what used to be considered too big to fail.

I will be publishing an article that touches on this tomorrow.


On Mar 22 02:04 PM John Lounsbury wrote:

> I have been waiting for your take on the banking situation. Thanks
> for publishing at a most opportune time.
>
> My emotional side tells me that "trust busting" is needed. My logical
> side tells me that super large financial structures are needed to
> coordinate the global economy. I depend on those with a lifetime
> experience in banking (especially international banking), such as
> you, to lay out the pros and cons of various proposals.