Big Banks Too Big to Fail

Big Banks are now Even too Bigger to Fail

Big Banks are now Even too Bigger to Fail

DePaulia Money

By Steven R., Allan G., and Paige Q.

DePaulia Money

By Steven R., Allan G., and Paige Q.

U.S. bank regulators including the Fed are trying to use higher capital, liquidity and risk management standards to curb risks from the size and complexity of big banks. We believe that the variety of rules and regulations the Fed has set up will only slightly curb the TBTF problem and that until drastic measures such as downsizing these corporations takes place, there will continue to be a slue of obstacles that arise around our banking system.

What happens now that the banks that were big prior to the crisis are now even bigger? JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs held more than $8.5 Trillian in assets at the end of 2011. That amount is equal to 56 percent of the U.S. Economy. Within five years, that is up 43 percent.

The current capital requirement is not enough to prevent a financial crisis based on the activities of large banks. These higher capital requirements are necessary only when these too big to fail banks are reduced in size. A higher capital minimum will not because banks can still leverage huge amounts of debt that is riskier.

Having cash on hand is good and liquid, but another crisis would be much too detrimental for the financial system. They need to be able to fail so that the economy is fine in the future. Regulations are not enough because of the systemic risk these large banks impose on the entire world’s economy. The interconnection of these banks is too strong and leaves numerous big banks at risk of failing, an event that would destroy the entire financial system.

Risk management standards are too many standards and not enough diversity. It does not have the appropriate rules that are strong enough to combat the faulty areas.

William Dudley of the New York Fed addresses this issue:...