Just How Big Is the Too Big to Fail Problem?
By James R. Barth, Apanard (Penny) Angkinand Prabha and Phillip Swagel
March 22, 2012
"Just How Big Is the Too Big to Fail Problem?" examines the impact of recent changes in banking regulation since the financial crisis and suggests that it is uncertain if the changes will truly eliminate TBTF risk.
According to the authors, the new resolution authority designed to allow troubled big banks to fail will, apart from other issues, "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 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 largest in the world. The authors examine the question of whether limiting the size of U.S. banks may be put them at a competitive disadvantage globally.