Too Big to Fail Banks and Regulatory Regret
filed in Daily Buzz News on Jun.30, 2011
IPE at UNC submits:
Suppose policymakers send a clear signal: Banks that are “too big to fail” will be bailed out, so in return they must bear a stricter regulatory burden. Banks that are not too big to fail will not be bailed out, so they have a laxer burden.
What incentive does that give to banks… get bigger to capture the guarantee, or get smaller to avoid the stricter regulation? Depends on the regulation. But I don’t see any large bank responding to Basel III or Dodd-Frank or any other regulatory change by desperately trying to reduce size. That should provide some indication of what margin we’re operating at. And even if the banks are small enough to fail without systemic consequences, that doesn’t necessarily mean their creditors are:
Governments across the world are committed to allowing banks to fail in the future. Socialising bank losses is unpopular, and it creates moral hazard.