FDIC Chairman Sheila Bair wants to end the too big to fail concept and extend the proposal to create the authority to shut down failing systemically important financial firms to insurers and hedge funds.
No one seems to agree on which institutions should be included, and the debate seems to be unable to move forward. Bair’s position seems to be the most aggressive.
Bair said yesterday in Istanbul that while there were some problems in extending resolution authority beyond banks to insurers and hedge funds, which she called a “sea change” in their oversight, these could be overcome, according to Reuters.
“If you tighten regulation of the banks even more without dealing with the shadow sector you could make the problem even worse,” she said.
We guess that Bair didn’t listen to what Paul Volcker said a couple of weeks ago, speaking before the House Banking and Financial Services Committee, calling the concept of identifying systemically important banks “nonsense.”
Think of the practical difficulties of such designation. Can we really anticipate which institutions will be systemically significant amid the uncertainties in future crises and the complex inter-relationships of markets? Was Long Term Capital Management, a hedge fund, systemically significant in 1998? Was Bear Stearns, but not Lehman? How about General Electric’s huge financial affiliate, or the large affiliates of other substantial commercial firms? What about foreign institutions operating in the United States?
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