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Economy
How Europe Fixed Its Too-Big-to-Fail Problem
2016-04-21
Interesting piece from Politico (of all places) that discusses the problem of "too big to fail" banks. The article rather wisely notes that banks can't finance the once-every-twenty-years failures of the world banking system, and so should be prohibited from doing the things that lead to these failures.

I certainly don't have the expertise to dissect this in detail, and perhaps there's a counter-argument to letting Wall Street have its way more. But if I were a pol and knew that Wall Street wasn't going to support me anyway, I'd be pushing these ideas.
Posted by:Steve White

#4  I see the perverse incentives problem is recognized, and the regulators plan to address it through bonus deferral and clawback rules.

Link
Posted by: phil_b   2016-04-21 17:55  

#3  End FDIC & there will be a huge run on banks. Banks pay virtually no interest now, so why bother to maintain a bank balance?
Posted by: Anguper Hupomosing9418   2016-04-21 14:56  

#2  ...except those who trade with their own money or money from people who have explicitly signed on for this trading.

No margin. No banks that are FDIC'd.
Posted by: Procopius2k   2016-04-21 10:14  

#1  barring banks from crisis-inducing behavior was the best remedy

But it doesn't explain why. The problem is perverse incentives. If crises come along every 20 years, then if you are a banker who gets a yearly bonus based on performance, your best strategy is to take big risks, because you will make big bonuses for 19 years, then make none and could well get fired in the 20th year. So what. You've already made a pile of money in the preceding 19 years.

The solution is to bar everyone from trading derivatives etc, except those who trade with their own money or money from people who have explicitly signed on for this trading. The Lloyds of London model.

BTW, the size of the bank is immaterial. It's the size of the failure that matters.

Posted by: phil_b   2016-04-21 04:55  

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