The nation’s largest banks are strongly resisting efforts by the Federal Reserve and other regulatory agencies to impose stringent new capital standards, which proponents say will make “too big to fail” financial institutions much less likely to drag down the entire financial system in a future crisis. (John M. Berry in The Fiscal Times)
[B]anks are vying to be seen to be too big to fail because the effective state guarantee will cheapen their wholesale funding lines. (Keith Mullin in the International Financing Review)
No wonder the casual reader is confused about “systemically important financial institutions.” Is being one a good thing or a bad thing?
We can’t answer the question, but we can do a better job of demystifying the matter. Let’s start by ditching the “too big to fail” tag.
It should be enough that the term is the title of a book about the financial crisis of 2008 and a new movie based on that book. It’s been hijacked to describe institutions beyond big banks and threatens to become this decade’s “perfect storm,” the go-to cliché for lazy writers and stand-up comics.
The fact is that systemically (not “systematically” — another reason, as if one were needed, to shun Wikipedia) important financial institutions are not “too big to fail.” Nothing is too big to fail. What the designation will do, among other things, is require certain big U.S. banks and other businesses with $50 billion or more in assets to set aside a percentage of capital against the day they are threatened with collapse. U.S. regulators are considering what to require of financial firms they finally determine to be SIFIs (Ugh. I know.) European regulators this week proposed that the biggest banks put 1 percent to 2.5 percent of their assets in reserve.
The Dodd-Frank Act also requires big banks to establish plans for navigating bankruptcy if the sky falls. If that were to happen, they are not “too big to fail,” unless the government is going to redefine “fail.”
The business press likes to call such plans “living wills,” another term approaching cliché status. Real “living wills” are documents that spell out what we want done if we are at death’s door. If financial companies were “too big to fail,” the government wouldn’t have to worry about that. Goldman Sachs would live forever.
Using clichés and other imprecise language to describe serious and important financial matters is another example of dumbing down to the reader. It does not broaden understanding; it simplifies the mildly complex to the point of being wrong. Let’s work harder on our writing.