Table of Contents

Managing Risk in the Financial System

Managing Risk in the Financial System

Edited by John Raymond LaBrosse, Rodrigo Olivares-Caminal and Dalvinder Singh

Managing Risk in the Financial System makes important and timely contributions to our knowledge and understanding of banking law, financial institution restructuring and related considerations, through the production of an innovative, international and interdisciplinary set of contributions which link together the law and policy issues surrounding systemic risk and crisis management.

Chapter 13: Finding a Solution to the ‘Too-Big-To-Fail’ Problem

Arthur E. Wilmarth Jr.

Subjects: economics and finance, financial economics and regulation, money and banking, law - academic, finance and banking law

Extract

209 level playing field for smaller financial institutions and to encourage the voluntary breakup of inefficient and risky financial conglomerates.5 The financial crisis has proven that large universal banks operate based on a dangerous business model that is riddled with conflicts of interest and prone to speculative risk-taking.6 Taking the above into account, US and European governments should adopt reforms that will (i) greatly reduce the scope of governmental safety nets and thereby significantly diminish the subsidies currently provided to LCFIs, and (ii) facilitate the orderly failure and liquidation of LCFIs under governmental supervision, with consequential losses to managers, shareholders and creditors of LCFIs. I believe that five key reforms are needed to accomplish those objectives: (1) strengthening current statutory restrictions in the US on the growth of LCFIs, (2) creating a special resolution process to manage the orderly liquidation or restructuring of SIFIs, (3) establishing a consolidated supervisory regime and enhanced capital requirements for SIFIs, (4) creating a special insurance fund for SIFIs, in order to cover the costs of resolving failed SIFIs, and (5) rigorously insulating banks that are insured by the Federal Deposit Insurance Corporation (FDIC) and owned by LCFIs from the activities and risks of their nonbank affiliates. The following sections provide an overview of my proposed reforms. 13.2.1. Statutory Limits on the Growth of LCFIs Should Be Strengthened The Riegle-Neal Interstate Banking and Branching Act of 1994 (RiegleNeal) imposes nationwide and state-wide deposit concentration limits (deposit caps) on interstate expansion by large banking organizations. Under...

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