Everyone agrees humungous banks that are too big to fail (TBTF) are a humungous problem, but breaking them up is the big question.
Politicians, academics and even banking industry players have criticized the mega-banks for endangering the financial system, benefiting from unfair competition and accepting government bailouts.
Cornelius Hurley, director of the Boston University Center for Finance, Law & Policy, says he has a plan to end the TBTF problem without heavy-handed government regulation.
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Instead the proposal, called the Subsidy Reserve Plan, would rely on market discipline, Hurley writes in an article for the American Banker.
Under the proposal Hurley devised with former FDIC Chairman William Isaac, each TBTF bank would set aside a “subsidy reserve” line item on its balance sheet. The fund would increase yearly based on the estimated taxpayer subsidy the bank gets in the form of reduced funding costs, says Hurley, a former assistant general counsel at the Federal Reserve.
Separate from regulatory capital, the reserve would help protect creditors and the FDIC if the bank failed.
The bank could reduce the fund only if it shrank through sales, divestitures or spin-offs.
Because the reserve would keep growing without sales or divestitures, the shareholders, not regulators or politicians, would demand that the bank shrink, Hurley argues. “This is market discipline in its purest form.”
“TBTFs abuse taxpayers with their stealth subsidy,” Hurley states. “They abuse their customers and competitors with skewed pricing. And, worst of all, they abuse the financial system by exposing it to yet another series of bailouts.”
Other experts say the government must intervene to break up the mega-banks.
“We believe that market forces should be relied upon as much as practicable,” said Federal Reserve Bank of Dallas President Richard Fisher in a speech last week. “However, entrenched oligopoly forces, in combination with customer inertia, will likely only be overcome through government-sanctioned reorganization and restructuring.”
Fisher proposes separating the banks’ commercial and shadow banking affiliates and restricting access to the federal safety net to commercial banking operations.
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