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Wednesday, March 20, 2013

Bernanke on Too Big To Fail

On March 20, 2013, more than two years after the Dodd-Frank financial reform legislation became law, Federal Reserve chairman Ben Bernanke made it clear that the problem of too-big-to-fail banks had not been solved. “Too Big To Fail” is not solved and gone,” he said in a press conference. “It’s still here.” Apparently providing an orderly liquidation process for bankrupt banks is insufficient in keeping the U.S. economy free of banks of such size that their failure could threaten the economy itself. This point should have been apparent to all in 2010 as Congress was fashioning the Dodd-Frank Act. The fact that it was not points to the power of Wall Street in Washington.
Suggesting that more legislation might be needed, Bernanke said, “Too Big To Fail was a major source of the crisis . . . and we will not have successfully responded to the crisis if we do not address that successfully.” Dodd-Frank had not done the trick. More would be needed to rid the U.S. economy of the threat of banks too big to fail. If holding more capital does not make the big banks safer, “we will have to take additional steps.” This, he said, “is important.”
Because the mammoth size of big banks such as Citibank and Bank of America makes their failure a threat to the viability of the financial system and even the overall economy, it is important to realize that such size is an advantage because the market assumes the U.S. Government would have to bailout such banks if they get into financial trouble taking on too much risk. The sense of invincibility, plus lower borrowing costs, could lead big banks to take bigger risks and thus trigger yet another financial crisis. Bankers at such banks may even feel free to commit fraud, as U.S. Attorney General Eric Holder admitted that large banks are nearly immune from government prosecution for crimes, given the risks to the economy from the failure of a convicted bank. In other words, the risk taken on could easily outstrip even the additional capital requirements in Dodd-Frank.

 

Source: Mark Gongloff, “Ben Bernanke: ‘I Agree With ElizabethWarren100 Percent’ On Too Big To Fail,” The Huffington Post, March 20, 2013.

 

Monday, March 18, 2013

On the Ethics of the E.U. (or Germany) Making Large Cypriot Bank Depositors Pay

After an initial assessment of Cyprus’s bank shortfall of around €17.5 billion in January 2013, the matter of a bailout came to a head two months later. The sticking point was whether depositors in Cyprian banks would be charged a one-time levy as the Cypriot part of the bailout. The E.U. and the European Central Bank, backed up internationally by the IMF, insisted that the bailout be limited to €10 billion, with the remainder of the shortfall’s bailout, over €5 billion, being necessarily supplied by Cyprus through a levy on depositors. Not having been culpable in the Cypriot bankers’ decisions to buy Greek bonds, the depositors spontaneously rose in protest. For a time, that seemed to work. The Cypriot legislature initially rejected the troika’s proposal. In the end, the Cypriot legislature narrowly approved the loan agreement 29 to 27 in late April, 2013. The question I address here is whether the obligations assumed on the Cyprus side are ethical or unethical.


                                                                                 Cypriots protesting a proposed levy on all bank accounts.  CNN

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.