LOS ANGELES, CA — (Marketwire) — 03/26/12 — “Just How Big Is the Too Big to Fail Problem?”, a new report from the Milken Institute, examines the impact of recent changes in banking regulation and whether they will eliminate the problem of overly large and therefore vulnerable banks.
In their analysis of the post-crisis regulatory landscape, the authors — Senior Finance Fellow James Barth, Economist Penny Prabha and Senior Fellow Philip Swagel — suggest that it is uncertain if the changes will truly eliminate TBTF risk.
The new resolution authority to allow big banks to fail, according to the authors, “will be incomplete and perhaps unworkable until there is more progress on the international coordination of bankruptcy regimes.”
Other provisions in Dodd-Frank, such as the Volcker rule, limit firms- activities and scale. “But it is difficult to evaluate the cost-benefit ratio,” the authors state, “since there is little evidence on either side. In a sense, it is not even easy to pinpoint the problem to which the Volcker Rule is the solution.”
The report also puts the U.S. “too big to fail” institutions into international comparison, pointing out that of the 50 biggest banks in the U.S., only seven are among the 50 biggest banks in the world. According to the report, “To the extent that the U.S. banks are limited in size they may be put at a competitive disadvantage as compared to the biggest banks in other countries.”
Dodd-Frank, enacted in July 2010, was the U.S. government-s effort to address the TBTF problem, with a provision to allow deeply troubled banks to fail without negative spillovers. New, more stringent requirements for capital and liquidity also raise the cost of being big. In addition, G-20 members have identified 29 global banks as “systemically important institutions” subject to more stringent prudential standards, and regulatory changes taking place worldwide lessen the risk of another big bank bailout. But will these and other reforms help or hinder the TBTF problem?
For the complete report, “Just How Big is the Too Big to Fail Problem?” go to
A nonprofit, nonpartisan think tank, the Milken Institute believes in the power of capital markets to solve urgent social and economic challenges. Its mission is to improve lives around the world by advancing innovative economic and policy solutions that create jobs, widen access to capital and enhance health. ()
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