In an interesting article from the New York Times, the idea of banks being "too big to fail" is presented with a retrospective view after the Great Recession nearly eight years ago. I think this article is especially fitting since it directly ties into our discussion of the financial crisis of 2007 and 2008 from the past week and a half. From class, we learned that one of the main causes of the recession was the housing bubble burst due to the sub prime mortgages and risky loans. However, this housing crisis also spread to other parts of the economy as well and was amplified through leverage, liquidity, and complexity. This article elaborates on some of the relevant aspects of the over leveraged larger banks, and the fact that they had to be bailed out since they were "too big to fail."
One part of the article that I thought was especially interesting was that it commented that 5 out of the 8 largest American banks were being criticized for not having "credible" plans for getting out of a recession without causing panic among citizens and that another government bailout would have to be the solution. A large part of the current political race contains controversy over these large banks and their growing complexities (even more complex then they were during the recession). With this idea in mind, several regulators seem to have backed Bernie Sanders idea to possibly split up some of the biggest banks and make them more manageable. Furthermore, both the FED and the FDIC have claimed that JP Morgan is "under prepared for a crisis in a number of areas." In the end, I wonder why banks are still becoming more and more complex and "too big to fail" after the Great Recession since it seems like they did not learn the key lessons that they should have.
Link: http://www.nytimes.com/2016/04/14/business/dealbook/living-wills-of-5-banks-fail-to-pass-muster.html?ref=business&_r=0
This is a really interesting article and as you said one that has a confusing end result. After the great recession, it seemed that banks would have systems in place for them to be more efficient, safe, credible, and smart about the ways in which they did business. However, as you article indicates it seems that maybe these assumptions are not correct. It seems that once a company becomes too big to fail that they do not pay as close of attention to the regulations put in place because there is little threat to them if they do not work out. With this being said it seems that the government is incentivizes this kind of behavior instead of the behavior they want to be elicited. With this being said, I think the incentives need to go to the banks that are doing the right things and creating credible and safe business instead of those who are not.
ReplyDeleteThe argument that some banks are "too big to fail" has deep roots within the government and also with the fear of the unknown. From the government's perspective, new rules and regulations seem to have corrected the recession so the underlying problem of banks and associated agencies not being hundred percent truthful of the quality of their assets and investments or simply not caring has been glossed over. Because of this the American government has continued to think along the lines of "too big to fail".
ReplyDeleteI think that these 5 banks should have credible plans in preparation for another recession, as the US shouldn't be responsible for bailing them out in the case of another recession. I don't think that increased complexity with their system is necessarily a problem, as long as they have policies in place for protecting themselves from another recession in the future. However, I do think that banks do need to be more prepared overall, and the government should take action in making sure that they are, but I'm not sure if splitting them up is the best way to manage and solve this problem.
ReplyDeleteThis greatly ties into our recent class discussions about the recent recession. It is concerning that banks did not learn their lesson from the happenings of the recession. Because these banks are "too big to fail," they are not worried about being over leveraged. It is important that these banks make changes to be better for future economic downturns in order to lessen the overall effect.
ReplyDeleteI don't think there will be a time where these banks will not be "too big to fail". I am really surprised to hear that these banks are not prepared to protect themselves if this occurs again.
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