Simon Johnson’s lunch talk was pretty standard: there is no social benefit to banks being larger than $100 billion in assets. Major banks are too politically powerful, but they should be fought the same way Teddy Roosevelt did with JP Morgan and trustbusting. Simon thinks that political opinion is shifting on this issue. He calls for a size cap based off of a 4% percent of GDP for commercial bank assets, and 2% for investment banks. This would only affect 6 banks, and would put the banking system sizewise where it was in 1990.
A frequent comment is that Canadian banking is concentrated, and they haven’t been hurt. But other nations have concentrated banking and have gotten into trouble, notably Switzerland and the UK.
One commenter noted that reliance on wholesale funding drove much more of the panic than deposit funding.
Now the third panel starts:
Rob Johnson spoke about creating a credible resolution authority. He asked why we can’t send Large Complex Financial Institutions [LFCI] through Chapter 11? Derivatives must be simplified and brought into clarity. Contagion, complexity, etc. No real solution offered.
Jane D’Arista — Financials cannot insure other financials. Leverage must be scaled back. Various types of short term funding must be scaled back. Margin standards must be extended to all financial instruments.
Richard Neiman — Banks are risk-takers, that provide a social service, thus taxpayer guarantees via the FDIC. Volcker rule may not have prevented the last crisis, but it might prevent the next. Need a group to try to be proactive on future risks — war-gaming. Attempt to predict black swans.
(DM: most of this can be done by following increases in leverage.)
Arthur Wilmart: no magic bullet. Fed overstimulated housing market after dot-com crash. Reduce implied subsidy to banks. How to internalize the costs? Three problems on deposit limits: failing banks, intra-state acquisitions and thrifts aren’t counted. Narrow banking would contain the subsidy. Systemic risk insurance fund — at least $300 billion, pre-funded. FDIC would manage it — most competent of the regulators.
Frank Pasquale — Talks about information asymmetries, need more disclosure. Financial privacy — banks that are big would have to reveal a lot more. Records of everything would have to be kept for a long time 10-15 years.
A discussant: choosing the lax regulator (DM solution: government assigns the regulator)
DM: banks should not lend to or own other financial firms. That would end contagion. At least that should be limited to a percentage of assets, or through the RBC formula.
One panelist suggests that all financial instruments be traded on exchanges. (Ridiculous, because only common instruments can can trade on exchanges. Unique things don’t trade on exchanges. That’s why IBM equity trades on an exchange, but most IBM bonds don’t.)
Discussant: banks cannot self regulate, not even as a group.
Cheapest source of funds are FDIC-backed deposits. That’s the big subsidy. (DM: Charge a much larger FDIC fee.)
Discussant: won’t narrow banking create more risk outside the banks? Where things are less regulated? Those losing money outside of the banks would end up taking a haircut.
Discussant: GS or MS failing would still shake the system.
Discussant: a new insurance fund would be difficult to make work. Also,a new regulator might not be better than existing regulators
Discussant: Regulating money market funds as banks. (DM: money market funds lost so little, and banks lost so much… why is this an issue.)