Too big to fail?
As the Federal Reserve comes under pressure to disclose the details of those banks that sought financial assistance at the height of the crisis, the question remains will governments and central banks bail banks out again, and does 'too big to fail' still apply?The stigma attached to those US banks that received financial assistance at the height of the financial crisis looks set to continue as newswire's report that the Federal Reserve is trying to delay a Freedom of Information request by Bloomberg to publish information on those banks that may have failed without government support during the financial crisis.
Bloomberg is seeking information on the names of the banks who went to the Fed for money at the height of the crisis, how much money they requested, and what they put up as collateral. An appeals court refused to reconsider a decision compelling the Federal Reserve Board to release the documents identifying the banks.
The Fed reportedly says that disclosing the names of the banks would cause "severe and irreparable competitive injury" to the firms and that it could dissuade them from seeking Fed help in the future. It is this last statement that bowled me over slightly. Should the Fed or any central bank for that matter be in the business of encouraging banks to seek Fed assistance? Does the financial crisis set a dangerous precedent in that banks deemed 'too big too fail' are guaranteed central bank assistance?
Ironically, Stephen Hester, the CEO of Royal Bank of Scotland, one of the largest recipients of UK government bail out money, was quoted recently as saying that "failing" financial institutions should be allowed to collapse without governments and taxpayers being called on to bail them out and that any "safety net" could encourage banks to indulge in excessive risk taking.
The Fed's disinclination to discourage banks from seeking financial assistance when they next get into trouble also appears to be at loggerheads with the message the Obama administration and other governments are putting out, which is, 'We can never let this happen again'.
That may not be an entirely realistic proposition, as governments and central banks may find themselves in the position again where they are asked to bail out certain banks, and given the systemic implications of letting some banks fail, a blanket 'No' response may not be the answer.
However, John Kay, vising professor at the London School of Economics writing in the recently published The Future of Finance: The LSE Report, states that there should be no 'too big to fail' doctrine and no government insurance of counterparty risk. He says institutions that cannot function without help should be put into "resolution" and if their problems cannot be resolved without public assistance they should be wound up and senior management removed.
We'd like to know your thoughts.
Date Posted:26th August 2010