Why is the regulation of “swaps” important to failing systemically significant institutions?
Have you ever considered how much faith and confidence play a role in the financial sector?  The calling in of swaps could cause issues similar to a Bank Run, which may or may not involve others coming into play.  While this is cleaning up the mess from a few years ago, there is something to be said for how complicated are various financial instruments in this situation. If you want something similar to ponder, what would make any institution be considered major and would this be agreed by various countries given how connected things are within the world?  What makes an institution major in the United States may not be quite the same standards in Brazil and this where one has to consider how to maintain faith in the system that could unravel rather badly if everyone tries to cash out at the same time.  The Bank Run link above is something to consider that could cause a bank that appears fine to suddenly have speculators cause more disruptions which isn't likely to help.  The global credit markets aren't likely to freeze overnight and thus there can be the question how does this get handled if another mess could arise. The idea here is to set up the framework to prevent the panic that could lead to a global depression.  The idea is to create for derivatives something similar to the stock market's trading curbs that exist to contain panic on a macro level.  The psychology is quite important in figuring out how to handle the obligations of a company that was perceived to be infallible as well as making sure what is agreed works across various cultures and currencies.
The Gramm-Leach-Bliley Act was not repealed, it was approved. I think you mean that the Gramm-Leach-Bliley Act, among other things, repealed what was left of the Galss-Steagal Act of 1933 (there was another by the same name on 1932).  The issue is that soem regulations are enacted and some are repealed. The result during each of the last decades and by a big margin has been an increase of the regulations. And as I said by a big big margin. The rethoric of de-regulation is just political rethoric, it has not happened. Just check the government data.  Now, it can happen that some regulations dont matter much and some others matter a lot, so checking the number or size of the regulations, while it describes a tendency, can also be deceiving. But again, since the debate over de-regulation is political they only focus on slogans and not on real analisys.  So going back to the particular regulation you mention, the removal of Glass-Steagal Act was positive. If it had not been removed the crisis would have been far worse. If you are interested we can discuss why (I already wrote enough for one comment). "The trouble is that everybody is afraid of the consequences of letting ""too big to fail"" fail. I contend that it would be painful, but we would be better off in the long run if we let those with bad economic practices go out of business instead of rewarding them.  Edit: It is like the difference between having a necessary needle shot quickly and sharply painful or having it slowing inserted and pulled out multiple times which is the equivalent of what we are going through now." And I was being facetious, apologies.   I think your assertion that the  &gt; entire crux of the story was that credit ratings agencies weren't transparent  is a massive simplification of what happened. There are many great analyses of the crisis, and most of them come to the conclusion that 'it was a perfect storm' of different factors.  I gather you think the problem was regulatory, I think the problem is systemic.   To me it doesn't matter how the regulations are written what matters are the incentives. I see no evidence that the regulatory agencies in the US can effectively police, let alone effectively deter financial institutions from skirting the laws. In fact I think wall street runs on such a haystack of grey-area regulations that without wholesale, root and branch reform (e.g. antitrust laws similar to Standard Oil to be used on the big banks) there's no hope that any patchwork of regulations, well-intentioned as they may be, from making a difference.   CDOs are a great example of what to avoid. [it was 15 to 1 before the SEC decided that big banks needed to be able to risk more.](http://en.wikipedia.org/wiki/Net_capital_rule)  it also started teh distrust between banks. With 15 to 1 you were pretty sure that another bank you were dealing with was leveraged exactly 15 to 1. WHen he removed that requirement, then banks had a much harder time judging the health of other banks they were dealing with.   you just didnt know if they were 20 to 1 or 30 to 1 or higher, without going through all their books.  This was one of the main reasons the recession was so large in scope. Housing would have exploded eventually, but without the leverage regulations they were able to make it hurt far far far far far far worse.. several times worse. "It's a problem from hell because all solutions have drawbacks/unintended consequences and because they are all pretty complex to implement in practice.  Breaking up the big banks so that no bank is enough to bring down the economy with it is the strongest move, but is riddled with problems when you start looking at it practically. How do you determine the ""maximum size"" a bank should have? Should it be based on assets? Systemic importance (i.e. interconnectedness with other banks)? How do you enforce it? Banks will find ways to offload assets, etc. into special purpose corporations to get around the laws somehow. How do you compensate for the fact that size does help financial efficiency in some ways?  Imposing higher capital requirements is the next solution. But that too is not so easy to implement with full success in practice. What should be classified as a low-risk asset? How much capital do you require against a CDO vs a Mexican government bond? How often do you need to revise these standards? At what point does the cost of higher capital requirements start to strangle lending and financial flows?  The weaker maneuvers are things like constant government-imposed stress tests, orderly resolution mechanisms, higher standards for internal risk management practices, etc. but those may not be adequate and also have their implementation problems." Thanks for the detailed reply. One thing that makes me furious is that whenever something screws up in other sectors (such as contaminated drugs, or a residential tower catching on fire), we always take necessary steps to prevent it from happening again.   But for the financial sector, when they screw up there's this careless hand waving: Sorry, nothing could've prevented this... nothing can be done... perfect storm... market forces... those subprime mortgagors should've paid up...   Like, seriously? We're just supposed to sit back and let it happen again and again? I never borrowed a cent from any bank in my life, yet I still got royally screwed by the recession in terms of where I am in my professional career. This goes for millions of other people too.   Something needs to be done. Of course every regulation has its drawback, but as long as the benefit outweighs the detriment, I'm absolutely for it. "This is the best tl;dr I could make, [original](http://www.imf.org/en/Publications/WP/Issues/2017/08/07/Cyber-Risk-Market-Failures-and-Financial-Stability-45104) reduced by 61%. (I'm a bot) ***** &gt; Risk awareness has been increasing, firms actively manage cyber risk and invest in cybersecurity, and to some extent transfer and pool their risks through cyber liability insurance policies.  &gt; This paper considers the properties of cyber risk, discusses why the private market can fail to provide the socially optimal level of cybersecurity, and explore how systemic cyber risk interacts with other financial stability risks.  &gt; The paper concludes discussing policy measures that can increase the resilience of the financial system to systemic cyber risk.   ***** [**Extended Summary**](http://np.reddit.com/r/autotldr/comments/6s97db/imfcyber_risk_market_failures_and_financial/) | [FAQ](http://np.reddit.com/r/autotldr/comments/31b9fm/faq_autotldr_bot/ ""Version 1.65, ~185649 tl;drs so far."") | [Feedback](http://np.reddit.com/message/compose?to=%23autotldr ""PM's and comments are monitored, constructive feedback is welcome."") | *Top* *keywords*: **Risk**^#1 **cyber**^#2 **paper**^#3 **IMF**^#4 **financial**^#5" Um, wut?  It took a failure for the SIFI to be defined in the first place.  It took the failure of Lehman and Bear Stearns for the US goverments to actively attempt precluding *any more failures* of what were yet-to-be-called, SIFI's.  Is this really such a hard concept to grasp?  Largely unforeseen failure first, further failure avoidance second. Proper enforcement of laws currently on the books that should have prevented a company like Citi from selling loans that violated their own underwriting standards would have knocked out a huge part of it. Banks would have been a lot less willing to give loans to people who couldn't afford them if they knew that they couldn't flip them on the secondary market. It's a good answer. I was alluding to cryptocurrency such as bitcoin which was a pretty genius invention (blockchain and mining) to solve the honesty problem (counterparty risk) you outlined when there's no trusted middleman to help keep people honest. Sounds like a dodgy cat though! You bet if it was so simple. This is when financial acumen comes into its true form. The bank would never ever want to go insolvent. What it does is, take insurance against the borrower defaulting.  Remember the financial crisis of 2008 which was the outcome of borrowers defaulting. The banks had created derivatives based on the loans distributed. CDO, CDS are some of the simple derivatives banks sell to cover their backs in case of defaults. There are derivatives using these derivatives as underlyings which they then sold it across to other buyers including other banks. Google for Fabrice Tourre and you would realise how much deep the banks go to save themselves from defaulters. If everything fails then go to the government for help. That was what happened when the US government doled out $600 billion to save the financial sector. This article is 100% incorrect. The governments main concern is to PREVENT depositors and tax payers from losing funds in the case of bank default.  How?  By having debt holders being forced to converted into equity to create a capital buffer to keep a bank solvent which will help protect depositors and prevent tax payers from having to bail the banks out.  Please ask me more questions on this as I have done a lot of work on this topic as of late. Say your bank gives you a loan at a fix interest rate.  They can loan money themselves for a floating interest rate.  So they try to find someone who will pay, or take, the difference between the fix and the floating interest rate on your loan.    That's an interest rate swap and there is nothing evil about it per se.  Derivatives are like knives, you can use them for live saving heart surgery or just butcher a kid in a back alley.    The inherent danger lies in the fact that it is easier to create than to understand complex derivatives.  This can lead to both sides believing they made on the derivative transaction, a logically impossible situation.  Therefore it is always good when derivatives are traded in a transparent, well-regulated market, where current market price is determined.  But then the expected profit margins are small, so investment bankers will always try to find more exotic derivatives (think of a blindfolded kid using chainsaws for brain surgery).    We need standard derivatives or we have to re-think the whole finance world from grounds up, without any guarantee we'll find anything working any better.  We don't need exotic derivatives, they're almost exclusively there because people shoot for bonuses. "What EU wanted to force Cyprus to do is to break the insurance contract the government has with the bank depositors. The parliament rightfully refused, and it didn't pass. In the EU, and Cyprus as part of it, all bank deposits are insured up to 100,000EUR by the government. This is similar to the US FDIC insurance. Thus, requiring the ""small"" (up to 100K) depositors to participate in the bank reorganization means that the government breaks its word to people, and effectively defaults. That is exactly what the Cyprus government wanted to avoid, the default, so I can't understand why the idea even came up. Depositors of more than 100k are not guaranteed against bank failures, and indeed - in Cyprus these depositors will get ""haircuts"". But before them, first come shareholders and bondholders who would be completely wiped out. Thus, first and foremost, those who failed (the bank owners) will be the first to pay the price. However, governments can default. This happened in many places, for example in Russia in the 90's, in Argentina in 2000's (and in fact numerous times during the last century), the US in the 1930's, and many other examples - you can see a list in Wikipedia. When government defaults on its debts, it will not pay some or all of them, and its currency may also be devaluated. For example, in Russia in 1998 the currency lost 70% of its value against the USD within months, and much of the cash at hands of the public became worthless overnight. In the US in 1933 the President issued an executive order forbidding private citizens keeping gold and silver bullions and coins, which resulted in dollar devaluation by about 30% and investors in precious metals losing large amounts of money. The executive order requiring surrender of the Treasury gold certificates is in fact the government's failure to pay on these obligations. While the US or Russia control their own currency, European countries don't and cannot devaluate the currency as they wish in order to ease their debts. Thus in Euro-zone the devaluation solutions taken by Russia and the US are not possible. Cyprus cannot devaluate its currency, and even if it could - its external debt would not likely to be denominated in it (actually, Russian debt isn't denominated in Rubles, that's why they forced restructuring of their own debt, but devaluating the currency helped raising the money from the citizens similarly to the US seizing the gold in 1930's). Thus, in case of Cyprus or other Euro-zone countries, direct taxes is the only way to raise money from the citizens. So if you're in a country that controls its own currency (such as the US, Russia, Argentina, etc) and especially if the debt is denominated in that currency (mainly the US) - you should be worried more of inflation than taxes. But if you're in the Euro-zone and your country is in troubles (which is almost any country in the zone) - you can expect taxes. How to avoid that? Deal with your elected officials and have them fix your economy, but know that you can't just ""erase"" the debt through inflation as the Americans can (and will), someone will have to pay." I understand what you mean, but for the general population the technicalities of secondary market is fundamentally a grey area. However, in my opinion, leading financial institutions such as GS, I expect them to make prudent decisions that is both ethical &amp; sustainable for the society as whole, even though it might not be feasible all the time.