Paul Lachine

Why Target Big Banks?

The financial crisis held a lesson that many have ignored: it is the contagiousness of financial crises, not banks’ size, that matters. After all, any list conjured up in 2006 of institutions that were “too big to fail” would not have included Northern Rock, Bradford & Bingley, IKB, Bear Sterns, or even Lehman Brothers.

LONDON – It seemed that a new model for global governance had been forged in the white heat of the financial crisis. But now that the ashes are cooling, different perspectives on bank regulation are emerging on either side of the Atlantic.

The emphasis in Europe has been on regulating financial markets with a view to moderating future crises. Credit mistakes are made during the boom, not during the crash, so the argument goes. Better regulation and monetary policy during the boom years, therefore, could limit the scale of any bust.

By contrast, the emphasis in the United States has been on finding market-friendly ways to contain spillovers from bank failure. Policy debates in the US are chiefly preoccupied with ensuring that banks are never “too big to fail”; that private investors rather than taxpayers hold “contingent capital,” which in a crash can be converted into equity; and that “over-the-counter” markets’ functioning be improved through greater reliance on centralized trading, clearing, and settlements.

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