I would file this under the heading, we need to be seen doing something. The Fed has come up with a limit to the size of banks based on the amount of liabilities of the firm (WSJ story). This is where the combination of free market ideas and risk mitigation come into conflict. One of the first questions I ask my students in bank regulation is, “Is big necessarily bad?” What we do going forward is not clear, but this regulation isn’t going to affect current banks, as in make them get smaller. So how have we really changed things? We haven’t, but it looks like we are doing something.
Even planned economies can encounter trouble with lending and defaults. Such has been the case with China over the last year or so. A regulatory crackdown on connected lending and less than above board tactics has been ongoing as well. Now there is the promise that credit availability will expand, but in accordance with regulatory wishes (Bloomberg article).
I think the aspect of this I find the most amusing in this article is the suggestion from President Hollande that the penalty would “…[introduce] a risk, doubts, suspicions about the soundness of Europe’s financial system…” This seems to suggest that we do not already have doubts and suspicions about the risks and soundness of the European financial system. You broke the rules, and you pay the price. The move to make companies admit guilt is a new approach, and a welcome one. This forces banks to really address what their policies are and face the consequences.
My bank regulation students received their final paper topic today. This is a big one. Let me preface this by saying that I have high regard for my students. They have excellent analytical and technical abilities and I think, generally speaking, they are able to bring these skills to bear on important problems. So I decided to give them a big one in bank regulation. I asked them to solve the problem of “Too Big to Fail” (TBTF).