 |
Add to My Group
2
2
1
View Ratings |
Rate It
William K. Black's Proposal for “Systemically Dangerous Institutions”
By George Washington (about the author) Page 1 of 3 page(s)
For OpEdNews: George Washington - Writer William K. Black, Associate Professor of
Economics and Law at the University of Missouri – Kansas City, and the
former head S&L regulator, has written the following fantastic new
proposal concerning the giant, insolvent banks. Posted/reprinted with
Professor Black's permission.
Associate Professor of Economics and Law
University of Missouri – Kansas City
blackw@umkc.edu
September 10, 2009
Historically, “too
big to fail” was a misnomer – large, insolvent banks and S&Ls were
placed in receivership and their “risk capital” (shareholders and
subordinated debtholders) received nothing. That treatment is fair,
minimizes the costs to the taxpayers, and minimizes “moral hazard.”
“Too big to fail” meant only that they were not placed in liquidating
receiverships (akin to a Chapter 7 “liquidating” bankruptcy). In this
crisis, however, regulators have twisted the term into immunity.
Massive insolvent banks are not placed in receivership, their senior
managers are left in place, and the taxpayers secretly subsidize their
risk capital. This policy is indefensible. It is also unlawful. It
violates the Prompt Corrective Action law. If it is continued it will
cause future crises and recurrent scandals.
On October 16, 2006,
Chairman Bernanke delivered a speech explaining why regulators must not
allow banks with inadequate capital to remain open.
http://federalreserve.gov/newsevents/speech/bernanke20061016a.htmCapital
regulation is the cornerstone of bank regulators' efforts to maintain a
safe and sound banking system, a critical element of overall financial
stability. For example, supervisory policies regarding prompt
corrective action are linked to a bank's leverage and risk-based
capital ratios. Moreover, a strong capital base significantly reduces
the moral hazard risks associated with the extension of the federal
safety net.
The Treasury has fundamentally mischaracterized
the nature of institutions it deems “too big to fail.” These
institutions are not massive because greater size brings efficiency.
They are massive because size brings market and political power. Their
size makes them inefficient and dangerous.
Under the current
regulatory system banks that are too big to fail pose a clear and
present danger to the economy. They are not national assets. A bank
that is too big to fail is too big to operate safely and too big to
regulate. It poses a systemic risk. These banks are not “systemically
important”, they are “systemically dangerous.” They are ticking time
bombs – except that many of them have already exploded.
We need
to comply with the Prompt Corrective Action law. Any institution that
the administration deems “too big to fail” should be placed on a public
list of “systemically dangerous institutions” (SDIs). SDIs should be
subject to regulatory and tax incentives to shrink to a size where they
are no longer too big to fail, manage, and regulate. No single
financial entity should be permitted to become, or remain, so large
that it poses a systemic risk.
SDIs should:1. Not be permitted to acquire other firms
2. Not be permitted to grow
3. Be subject to a premium federal corporate income tax rate that increases with asset size
4. Be subject to comprehensive federal and state regulation, including:a. Annual, full-scope examinations by their primary federal regulator
b. Annual examination by the systemic risk regulator
c. Annual tax audits by the IRS
www.WashingtonsBlog.com
The views expressed in this article are the sole responsibility of the author
and do not necessarily reflect those of this website or its editors.
 Contact Author |
Contact Editor |
 View Authors' Articles |
by Steven Brostoff
$5.95
Number of pages: 3
Publisher: The National Underwriter Company
by David B Humphrey
Number of pages:
Publisher: Financial Studies Section, Division of Research and Statistics, Board of Governors of the Federal Reserve System
by Edith Orenstein
$9.95
Number of pages: 6
Publisher: Financial Executives International
by Unavailable
$9.95
Number of pages: 8
Publisher: American Institute of CPA's
| 4 comments |
Want to post your own comment on this Article? 
|
||||
|
||||||||||||||
Touching (0) 
Funny (0) 
Supported (0) 
Interesting (0) 
Inspiring (0) 
Valuable (1) Tell a Friend:
|
Copyright © 2002-2009, OpEdNews |
