ON BANK MERGERS- WHAT JOSEPH E STIGLITG SAYS The global financial crisis underscored, inter alia, the im¬perative of effective bank resolution mechanism as part of crisis prevention and management framework. Within the realm of resolution mechanism, mergers and acquisitions (M&A) are often resorted to as the preferred option.“Financial institutions which are too big to fail, too interconnected to fail, or too correlated to fail have an incentive to gamble: if they win, they walk off with the profits, if they lose; the public picks up the losses. But the problems are deeper: banks have an incentive to become too big, too intertwined, and too correlated to fail; and because of the implicit guarantee that is provided to such institutions, they have an advantage over other institutions. The private returns to growth in size and to interconnectedness exceed by a large measure the social returns (which may, in fact, be negative.) One aspect of “correlated” risk taking is the herding behavior that marks credit bubbles. Such irrational bubbles are a major source of macroeconomic volatility. In the past, regulation has typically focused on the safety and soundness of individual banks, but once we recognize the central role of the correlated behavior of banks in causing macroeconomic fluctuations, we have to ask how we can design a regulatory structure to reduce the scope and severity of such finance induced fluctuations. There should be strong regulations restricting the size and interconnectedness of banks. (Some of these restrictions relate to derivatives and CDS’s, are discussed under point 6 below.)Taxes on large banks should be levied to “level the playing field.[ Quoted from Joseph E. Stiglitz’s lecture which was given in Mumbai on January 3, 2013, to commemorate C.D. Deshmukh, who capped his 21 years in the Indian Civil Service with an outstanding stint as Governor of the Reserve Bank of India from 1943-1949. During his tenure, he oversaw the Bank’s transformation to a nationalized institution, promoted regulation of banks, and established India’s first financial institution for the provision of long-term credit to industry. He later served as Union Finance Minister, Indias Special Financial Ambassador to America and Europe, and among many other notable achievements, made his mark in academia and public service. It is my honor to give this lecture in recognition of his deep contributions to India and to his field. ]
Posted on: Sun, 07 Dec 2014 04:21:49 +0000
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