“Banks that are seen by investors as too big to fail — as America’s huge, complex, and interconnected megabanks are — will inevitably be able to borrow money at lower interest rates than banks that are not deemed too big to fail. This amounts, in effect, to a taxpayer-provided subsidy encouraging banks to become even bigger and more complex. The trick, then, is to reduce the subsidy. Higher capital requirements are a start, but tighter regulations reducing complexity and risks are also necessary, including an iron-clad Volcker Rule prohibiting excessive speculation. As the subsidy is pared, market pressures could further reduce complexity and risk. Trimming the subsidy will trim profits, and as shareholders get a clearer picture of how banks perform without their too-big-to-fail backing, they presumably will demand that the banks begin to operate in a leaner, more competitive fashion — including curbs on exorbitant executive pay.”
Posted on: Mon, 29 Jul 2013 23:17:15 +0000
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