Resolving large, complex financial firms
How to best manage the failure of systemically important financial firms was the theme of a recent conference at which the latest research on the issue was presented. Here we summarize that research, the discussions that it sparked, and the areas where considerable work remains.
Did Dodd–Frank miss the mark? Financial experts’ and regulators’ perspectives on resolution plans
Abstract‘Not credible’. This statement was included in joint press release by the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation’s Board of Directors as part of the agencies joint summary statement of their reviews of the second round of resolution plans (RPs) submitted by 11 large banking organizations on 5 August 2014. The Dodd–Frank Wall Street Reform and Consumer Protection Act enhanced the powers bestowed on these agencies, to include oversight of the newly required, annual RPs, in an effort to reduce the risk posed when financial institutions become ‘too big to fail’, protect US taxpayers from the need for government bailouts, and protect consumers from abusive financial services practices. However, these initial RPs missed the mark. Moving beyond regulatory feedback, this article is the first to provide an empirical assessment of the perspectives of those expert closets to RPs: employees of the affected institutions that must submit RPs, who are responsible for their creation and maintenance, as well as of the federal regulators who oversee them. The latter emerge as far more sceptical than the former about the ability of RPs to protect US taxpayers. The main deficiencies relate to a lack of confidence that the government could avoid bailing out large institutions, regardless of the RPs; the lack of global authority; a lack of experience among regulators with unwinding large, complex banking organizations; and insufficient clarity in the regulatory guidelines.
Financial Consolidation: Dangers and Opportunities
This paper argues that although financial consolidation creates some dangers because it is leading to larger institutions who might expose the U.S. financial system to increased systemic risk, these dangers can be handled by vigilant supervision and a government safety net with an appropriate amount of constructive ambiguity. Financial consolidation also opens up opportunities to dramatically reduce the scope of deposit insurance and limit it to narrow bank accounts, thus substantially reducing the moral hazard created by the government safety net. Reducing the scope of deposit insurance, however, does not eliminate the need for a government safety net, and thus there is still a strong need for adequate prudential supervision of the financial system. Moving to a world in which we have larger, nationwide, diversified financial institutions and in which deposit insurance plays a very limited role, should improve the efficiency of the financial system. However, it is no panacea: the job of financial regulators and supervisors will continue to be highly challenging in the future.