Rosenblum points out that "too large to fail" is similar a shot de facto national policy (footnotes in addition to references to exhibits omitted): "In short, the province of affairs inwards 2008 removed whatever doubtfulness that several of the largest U.S.A. banks were besides large to fail. At that time, no way compiled, allow lone published, a listing of TBTF institutions. Nor did whatever depository fiscal establishment advertise itself to hold upward TBTF. In fact, TBTF did non be explicitly, inwards constabulary or policy—and the term itself disguised the fact that commercial banks asset roughly one-third of the assets inwards the banking organization did essentially fail, surviving solely amongst extraordinary government
assistance. Most of the largest fiscal institutions did non neglect inwards the strictest sense. However, bankruptcies, buyouts in addition to bailouts facilitated yesteryear the regime nonetheless found failure. The U.S.A. fiscal institutions that failed outright betwixt 2008 in addition to 2011 numbered to a greater extent than than 400—the most since the 1980s."
Moreover, enabling banks amongst an overdose of toxic assets to stagger frontward makes it difficult for monetary policy to so utilization those banks equally piece of occupation of a mechanism for stimulating lending in addition to the macroeconomy: " Bank uppercase is an number of regulatory policy, non monetary policy. But monetary policy cannot hold upward effective when a major component subdivision of the banking organization is undercapitalized. The mechanism of monetary policy hasn’t worked good inwards the electrical flow recovery. The primary reason: TBTF fiscal institutions. Many of the biggest banks own got sputtered, their residue sheets withal clogged with
toxic assets accumulated inwards the nail years."
So far, the policy answer to "too large to fail" has taken 2 forms: promising non to exercise it again, in addition to higher uppercase requirements. Neither is probable to lay an destination to "too large to fail."
The Dodd-Frank legislation promises no to a greater extent than depository fiscal establishment bailouts--but why would anyone believe such a vow?
"Dodd–Frank says explicitly that American taxpayers won’t in 1 lawsuit to a greater extent than ride to the rescue of troubled fiscal institutions. ... Going into the fiscal crisis, markets assumed at that spot was regime backing for Fannie Mae in addition to Freddie Mac bonds despite a lack of explicit guarantees. When force came to shove, Washington rode to the rescue. Similarly, no specific mandate existed for the extraordinary governmental assistance provided to Bear Stearns, AIG, Citigroup in addition to Bank of America inwards the midst of the fiscal crisis. Lehman Brothers didn’t larn regime help, only many of the large institutions exposed to Lehman did. Words on newspaper solely move so far. ...
"While decrying TBTF, Dodd–Frank lays out weather condition for sidestepping the law’s proscriptions on aiding fiscal institutions. In the future, the ultimate determination won’t relaxation amongst the Fed only amongst the Treasury secretarial assistant and, therefore, the president. The shift puts an increasingly political cast on whether to rescue a systemically of import fiscal establishment ...The credibility of Dodd–Frank’s disavowal of TBTF volition rest inwards query until a large fiscal establishment genuinely fails in addition to the wreckage is speedily removed so the economic scheme doesn’t dull to a halt. Nothing would exercise to a greater extent than to alter the risky demeanour of the manufacture in addition to its creditors. For all its bluster, Dodd–Frank leaves TBTF entrenched."
Higher uppercase requirements volition trim back around of the payoff of giant banks: "Policymakers tin brand their most immediate affect yesteryear requiring banks to concur additional capital, providing added protection against bad loans in addition to investments. ... TBTF banks’ sheer size in addition to their presumed guarantee of regime aid inwards fourth dimension of crisis own got provided a pregnant edge—perhaps a per centum betoken or more—in the terms of raising funds. Making these institutions concur added uppercase volition degree the playing land for all banks, large in addition to small."
But higher uppercase requirements are mainly aimed at reducing the demand for depository fiscal establishment bailouts, 1 depository fiscal establishment at a time. In a systemic fiscal crisis, they may good non suffice: "A nightmare scenario of several large banks requiring attending mightiness withal overwhelm fifty-fifty the most far-reaching regulatory scheme. In all likelihood, TBTF could in 1 lawsuit to a greater extent than move TMTF—too many to fail, equally happened inwards 2008."
It seems to me that if 1 is deeply serious almost stopping besides large to fail, 2 other policies demand to hold upward considered. One possibility would hold upward a policy of "narrow banking," where banks are maybe express to commercial banking, investment banking, in addition to wealth management, only are barred from running hedge funds, or beingness dealers or marketplace makers inwards fiscal securities. I posted almost 1 such proposal along these lines a pair of weeks ago, inwards "What Should Banks Be Allowed To Do?" Such "narrow" banks would accept on less risk, in addition to would also hold upward express to operating inwards a smaller piece of occupation of the overall marketplace for fiscal services
The other possibility is to lay a bound on how large banks tin grow. Rosenblum writes inwards a footnote: "Evidence of economies of scale (that is, reduced average costs associated amongst increased size) inwards banking suggests that at that spot are, at best, express terms reductions beyond the $100 billion asset size threshold. Cost reductions beyond this size cutoff may hold upward to a greater extent than attributable to TBTF subsidies enjoyed yesteryear the largest banks, peculiarly subsequently the regime interventions in addition to bailouts of 2008 in addition to 2009."
Rather than letting TBTF render an implicit subsidy for greater size, the regime could require that when a depository fiscal establishment grows to, say, $200 billion inwards assets, it needs to develop a conception for splitting itself inwards two, in addition to when a depository fiscal establishment approaches $300 billion inwards assets, it needs to lay that conception into effect. For banks, an payoff of such a proposal is that their activities would non demand to hold upward restricted, because the failure of fifty-fifty a few such banks wouldn't hold upward catastrophic. For perspective, JPMorgan Chase in addition to BankAmerica both had to a greater extent than than $2 trillion inwards assets inwards 2011, spell Citigroup in addition to Wells Fargo both had good over $1 trillion inwards assets. Too large to fail, indeed.