Monday, October 15, 2012
Fed Governor’s Plan to Limit Bank Size Fuels Debate
Here we find an article about a proposal to limit the size that a bank can reach. The idea is that "an important part of a bank’s balance sheet could be capped at a set percentage of the nation’s gross domestic product."This is something that Tanzi predicted should be done in the future. There are some clear positives and negatives with the proposal. So what do you think? Is this something that will/should be done in the near future?
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While I am theoretically in favor of such a limitation, I believe Mr. Barr has a good point in saying that, "If Congress took up reform, it would only be in the direction of weakening it, not strengthening it." I tend to believe that megabanks have become too big, and carry too much liability relative to capital, but our politicians are so closely tied to these financial institutions, that practically any reforms would probably have to finance some golden parachutes in order to get anywhere. Also, limiting the size of banks with only a single measure is likely to end in gamesmanship, such as the reduction in long-term liabilities mentioned in the article. Perhaps some banking standards for relative amounts of different kinds of debt could be useful, such as a minimum amount of long term debt relative to short term. Yet again though, the greater the complexity of the proposed legislation, the greater our reliance on politicians to do exceptional work, and the greater our potential to be profoundly disappointed by our politicians.
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