From two Federal Reserve officers, a strategy to reduce risk.
5/10/2004
While it seems that banks are getting bigger every day, this book challenges many common assumptions about the "too big to fail" or TBTF theory in banking. The authors, both officers with the Federal Reserve Bank of Minneapolis, warn that big banks can and do fail. But bailouts should be seen only as an avenue of last resort. If they are viewed merely as a guaranteed fail-safe, regardless of the level of institutional risk incurred, these bailouts could significantly weigh down the economy. The book cites extensive statistics indicating that banks are only getting larger, with more assets concentrated in the hands of a group of super-sized banks, which amplifies the potential for a major problem. Like a profligate squandering his fortune, the current allowances can't continue. At some point, due to exhausted resources, an expected bailout might not happen, causing a domino effect on creditorswith potentially catastrophic effects on the financial system and the economy overall. To prevent this, the book recommends a series of reforms for policymakers to enact in order to reduce expectations of bailouts when large bank failures occur.