Last month’s William Dudley speech on “too big to fail” started by stating that “we cannot tolerate a financial system in which some firms are too big to fail” and he add that “we are a long way from the desired situation in which large complex firms could be allowed to go bankrupt without major disruptions to the financial system and large costs to society.”
Some people might write Dudley off completely because he’s the president of the NY Fed and too closely connected to Wall Street (which he is), but this speech has a lot of smart ideas, as well as an open admission that breaking up the megabanks may be one good answer to solve the problem of TBTF going forward.
What’s most important to us is that Dudley acknowledges that “too big to fail” still exists and that it’s unacceptable. He even goes so far as to state that in the financial crisis of 2007-08 “TBTF contributed to the underpricing of risk in the system and did create a bad set of incentives, and if not addressed comprehensively, would likely be an even larger problem in the future.” It’s precisely because “too big to fail” (and all it implies) has the potential to be an even larger problem in the future that we’re fighting for people to switch to a local lender. You can help end “too big to fail” by switching.
Here’s an excerpt, speaking of the problem of “too big to fail”:
The problem has become more significant since that time for several reasons. First, the biggest financial institutions have become much larger, both in absolute terms and relative to the overall size of the banking system. This reflects many factors including the end of prohibitions on interstate banking, the repeal of the Glass-Steagall Act restrictions separating investment from commercial banking, the rapid growth of the capital markets, and the globalization of the economy—all of which created intense competitive pressures to expand in order to gain economies of scale and scope. …
Second, the complexity and interconnectedness of the largest financial firms increased markedly. Factors behind this include the adoption of a universal banking model by some commercial bank holding companies and the rapid growth of trading businesses, especially the over the counter (OTC) derivatives market. In the early 1980s, there were no true U.S. “universal banks” that combined traditional commercial banking with capital markets and underwriting activities. By 2007, there were several operating in the United States, including Citigroup, J.P. Morgan, UBS, Credit Suisse and Deutsche Bank. Also, the OTC derivatives business in foreign exchange, interest rate swaps and credit default swaps had exploded from its start in the early 1980s. The total notional value of the OTC derivatives outstanding for the five largest banks and securities firms currently totals about $200 trillion.