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Just how big is the too big to fail problem?

March 30, 2012

Just how big is the too big to fail problem?
Source: Milken Institute
From press release:

“Just How Big Is the Too Big to Fail Problem?”, a new report from the Milken Institute, examines the impact of changes in banking regulation since the recent financial crisis. The authors — Senior Finance Fellow James Barth, Economist Penny Prabha and Senior Fellow Philip Swagel — suggest that it is uncertain if the changes will truly eliminate TBTF risk.

According to the authors, the new resolution authority designed to allow troubled big banks to fail will, apart from other issues, “be incomplete and perhaps unworkable until there is more progress on the international coordination of bankruptcy regimes.”

Other provisions in Dodd-Frank, such as the Volcker rule, limit firms’ activities and scale. “But it is difficult to evaluate the cost-benefit ratio,” the authors state, “since there is little evidence on either side. In a sense, it is not even easy to pinpoint the problem to which the Volcker Rule is the solution.”

The report also puts the U.S. “too big to fail” institutions into international comparison, pointing out that of the 50 biggest banks in the U.S., only seven are among the 50 biggest banks in the world. According to the report, “To the extent that the U.S. banks are limited in size they may be put at a competitive disadvantage as compared to the biggest banks in other countries.”

Free registration required to download full report.

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