quinta-feira, abril 10, 2014

Too big to fail or to big to bail - limit bank size and leverage

The IMF has published reports on the risks to little countries with big banking systems, like Iceland, Ireland and Cyprus, where bank crashes drag sovereign ratings down.

But the problem of banks that are "too big to bail" is even more critical in the big countries, because the systemic impact is not just local but international, and the bailout of the foolish creditors causes moral hazard on a much bigger scale.  This is hapenning in the Eurozone where the costs of bad credit decisions are forced almost entirely on the borrowers.

That's why Sheila Blair of the  US FDICcapaigned to place an overall limit on bank leverage.  They have finally succeeded with the new rule dated 8-April - 2014:

US Agencies Adopt Enhanced Supplementary Bank Leverage Ratio 

The Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) on Tuesday adopted a final rule to strengthen the leverage ratio standards for the largest, most interconnected U.S. banking organizations.

We need a Sheila Blair in Europe. 

Source:  Heroes in banking reform and prudential supervision 
See also