Epiphanyblog

All about ideas…

Time for a new resolution trust authority to deal with “TBTF” banks?

with one comment

Few people have the experience and respect of Paul Volcker, now chairman of the president’s Economic Recovery Advisory Board. Volcker’s op-ed in the NY Times Sunday edition not only makes considerable sense but may be a way out of the “too big to fail” financial market mess that now plagues the world markets.

banks with cutout illustration

Artist: Brian Cronin, NYTimes

What we do need is protection against the outliers. There are a limited number of investment banks (or perhaps insurance companies or other firms) the failure of which would be so disturbing as to raise concern about a broader market disruption. In such cases, authority by a relevant supervisory agency to limit their capital and leverage would be important, as the president has proposed.

To meet the possibility that failure of such institutions may nonetheless threaten the system, the reform proposals of the Obama administration and other governments point to the need for a new “resolution authority.” Specifically, the appropriately designated agency should be authorized to intervene in the event that a systemically critical capital market institution is on the brink of failure. The agency would assume control for the sole purpose of arranging an orderly liquidation or merger. Limited funds would be made available to maintain continuity of operations while preparing for the demise of the organization.

To help facilitate that process, the concept of a “living will” has been set forth by a number of governments. Stockholders and management would not be protected. Creditors would be at risk, and would suffer to the extent that the ultimate liquidation value of the firm would fall short of its debts.

To put it simply, in no sense would these capital market institutions be deemed “too big to fail.” What they would be free to do is to innovate, to trade, to speculate, to manage private pools of capital — and as ordinary businesses in a capitalist economy, to fail.

Congress should be listening to Volcker and acting on his recommendations rather than playing political games with the security of American and world finances. Economic security is a requirement for businesses as well as families. Right now, the trust in that economic security is lost. Even the participants of the World Economic Forum in Davos recognized that not only has the game changed, but that the rules must change to prevent the next collapse.

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Written by Valerie Curl

January 31, 2010 at 4:22 PM

One Response

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  1. Great Blog, Dude! I’m really a home security aficionad0 and am always on the lookout for new and interesting sites and posts about stylish home security related stuff… which is what led me here. At any rate i just wanted to check in as I certainly plan on visiting again! See Ya

    Sabra Fason

    February 11, 2010 at 6:19 AM


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