too big to fail

Simone Baribeau

William C Dudley, president of the NY Federal Reserve, today spoke at length about the dangers of allowing a financial institution become “too-big-to-fail.”

Though he said there is “no one silver bullet” to prevent financial crisis (and, indeed, his speech highlighted the importance of effective macroprudential supervision and increasing the robustness of the financial system), he said that it was “critical that we ensure that no firm is too big to fail.”

The moral hazards with giant institutions were two-fold, he said. First, too-big-to-fail institutions would be able to get cheaper credit, since they’d effectively have an implicit government guarantee. Second, institutions would have an incentive to become large, simply so they could get the government backstop, reguardless of their financial health.

Notably, though, his solutions to the too-big-to-fail problem did not mention actually limiting firms’ size.  Read more

Short-term interest rates in the US have turned negative. This might mean imminent disaster or it might be traders chasing safe investments as they look to secure end-of-year profits – choose between numerous explanations.

There are also competing explanations for the rise in US mortgage delinquency rates. Most of the rise is in people who are extremely late on their payments, rather than just a little: Read more

Too-big-to-fail policies are giving banks the wrong incentive, namely to grow very big, very quickly. Clearing houses can collapse as well as banks, and Sri Lanka joins the rush for gold. Read more