TOO BIG TO REGULATE
By THE EDITORIAL BOARD
August. 9, 2014
If the Dodd-Frank financial reform law was working as it is supposed to, the biggest American and European banks would soon be facing stricter capital and leverage requirements, restrictions on their growth and operations, and even, in some instances, the forced divestiture of entire business units.
Those are the remedies regulators are authorized to impose on banks that fail to submit credible “living wills” — detailed plans, required by Dodd-Frank, for how they would dismantle their operations and financial contracts in an orderly way in the event of impending failure.
Last week — six years after the onset of the financial crisis, four years after Dodd Frank and two years after the biggest banks submitted the first drafts of their living wills — the Federal Deposit Insurance Corporation and the Federal Reserve rejected the plans from 11 large banks as “unrealistic or inadequately supported.” The regulators said further that the banks had failed “to make, or even identify” structural and operational changes that would be needed to attempt an orderly resolution.
And yet the regulators are not taking steps to downsize the banks. For that to occur, the F.D.I.C. and the Fed have to agree that living wills are unworkable and that more forcible downsizing is needed. The F.D.I.C. seems to have reached that conclusion; it said flatly that the plans don’t work. But not the Fed, which has told the banks to submit new plans by July 1, 2015. The banks have had four years already. Now they have nearly another year to toy with a process that has utterly failed to produce credible results.
The banks involved are Bank of America, Bank of New York Mellon, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and UBS. Like grade schoolers who blame the teacher when they don’t do their homework, they say they need more guidance from regulators to do the assignment properly.
Rest assured, however, that the Fed is giving them what they want. In their current form, the big banks are too big to fail. That’s why the law requires them to either write acceptable living wills or be downsized. But they haven’t done the former or faced the latter. That means they are still free to take outsized risks — and to enjoy the big paydays associated with those risks — secure in the knowledge that they will be bailed out if those risks blow up.
Will anything change between now and next July? Using the history of the last several years as a guide, the biggest banks will be even bigger, more complex and more interrelated by then. They will be undercapitalized and overleveraged. They will be reliant on unstable sources of short-term financing and will be more steeped than ever in speculative derivatives transactions.
In short, they will still be too big to fail, too big to manage and, judging from the Fed’s latest indulgence, too big to regulate.
Meet The New York Times’s Editorial Board
http://www.nytimes.com/2014/08/10/opinion/sun...ulate.html
By THE EDITORIAL BOARD
August. 9, 2014
If the Dodd-Frank financial reform law was working as it is supposed to, the biggest American and European banks would soon be facing stricter capital and leverage requirements, restrictions on their growth and operations, and even, in some instances, the forced divestiture of entire business units.
Those are the remedies regulators are authorized to impose on banks that fail to submit credible “living wills” — detailed plans, required by Dodd-Frank, for how they would dismantle their operations and financial contracts in an orderly way in the event of impending failure.
Last week — six years after the onset of the financial crisis, four years after Dodd Frank and two years after the biggest banks submitted the first drafts of their living wills — the Federal Deposit Insurance Corporation and the Federal Reserve rejected the plans from 11 large banks as “unrealistic or inadequately supported.” The regulators said further that the banks had failed “to make, or even identify” structural and operational changes that would be needed to attempt an orderly resolution.
And yet the regulators are not taking steps to downsize the banks. For that to occur, the F.D.I.C. and the Fed have to agree that living wills are unworkable and that more forcible downsizing is needed. The F.D.I.C. seems to have reached that conclusion; it said flatly that the plans don’t work. But not the Fed, which has told the banks to submit new plans by July 1, 2015. The banks have had four years already. Now they have nearly another year to toy with a process that has utterly failed to produce credible results.
The banks involved are Bank of America, Bank of New York Mellon, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street and UBS. Like grade schoolers who blame the teacher when they don’t do their homework, they say they need more guidance from regulators to do the assignment properly.
Rest assured, however, that the Fed is giving them what they want. In their current form, the big banks are too big to fail. That’s why the law requires them to either write acceptable living wills or be downsized. But they haven’t done the former or faced the latter. That means they are still free to take outsized risks — and to enjoy the big paydays associated with those risks — secure in the knowledge that they will be bailed out if those risks blow up.
Will anything change between now and next July? Using the history of the last several years as a guide, the biggest banks will be even bigger, more complex and more interrelated by then. They will be undercapitalized and overleveraged. They will be reliant on unstable sources of short-term financing and will be more steeped than ever in speculative derivatives transactions.
In short, they will still be too big to fail, too big to manage and, judging from the Fed’s latest indulgence, too big to regulate.
Meet The New York Times’s Editorial Board
http://www.nytimes.com/2014/08/10/opinion/sun...ulate.html
