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Ignore the Bickering

By: Kari English

Not surprisingly, the debate on whether large banks receive unspoken guarantees of government help in times of trouble continues. On Oct. 17, Financial Services Committee Chairman Spencer Bachus, R-Ala., released “The Dodd-Frank Act, the Persistence of ‘Too Big to Fail,’ and the Institutionalization of Government Bailouts.” In his paper, Bachus asserts that the Wall Street Reform and Consumer Protection Act created even larger institutions than before the crisis and did not end bailouts, but instead made them permanent with the FDIC’s orderly liquidation authority.

Around the same time, Congressman Barney Frank, D-Mass., also released analysis disputing such claims. Frank’s paper explains why the law ends TBTF and then argues that the modified bankruptcy proposal offered by Republicans during development of the Dodd-Frank Act “would have slowed the bankruptcy process down and potentially frozen the claims of many creditors, both of which would precipitate runs on the failing firm and exacerbate damaging effects within the financial system.” Frank’s paper also states the proposal “did not recognize, let alone explicitly protect taxpayers from, these destabilizing spillover effects.”

This argument may continue forever — or at least until the next financial crisis. Unfortunately, I think most people are already tired of hearing it. Fortunately, there are others in the industry avoiding the bickering and instead presenting practical methods for ending TBTF.

Federal Reserve Board Governor Daniel Tarullo in an Oct. 10 speech at the University of Pennsylvania Law School stated, “There would be merit in its adopting a simpler policy instrument, rather than relying on indirect, incomplete policy measures such as administrative calculation of potentially complex financial stability footprints. The idea along these lines that seems to have the most promise would limit the non-deposit liabilities of financial firms to a specified percentage of U.S. gross domestic product, as calculated on a lagged, averaged basis. In addition to the virtue of simplicity, this approach has the advantage of tying the limitation on growth of financial firms to the growth of the national economy and its capacity to absorb losses, as well as to the extent of a firm’s dependence on funding from sources other than the stable base of deposits.”

Now that sounds like something worth discussing.

The Bachus and Frank reports as well as Tarullo’s speech are available at the link below.

TBTF Arguments, Opinions and More

Kari English is senior editor of BankNews.

Copyright (c) November 2012 by BankNews Media