Too Big to Fail?

, Spencer Irvine, 1 Comment

At the Heritage Foundation, professors Charles Calomiris and Mark Flannery provided insights on the ramifications of the U.S. government’s bank bailouts after the 2007 financial crisis. Calomiris is the Henry Kaufman Professor of Financial Institutions at Columbia University’s Graduate School of Business and Flannery is the BankAmerica Eminent Scholar in Finance at the University of Florida.

The major issue with Dodd-Frank, said Calomiris, was how none of these problems were adequately fixed. Regarding the promise to liquidate and not bail banks out, Calomiris said, “Unfortunately, and I think now there’s a clear consensus across the board in terms of economists of all political tastes or affiliations, is that Article Two of Dodd-Frank institutionalized the bailouts of ‘Too Big to Fail’ banks rather than avoiding them.

How so? He said that the law created “a political path of least resistance to politicians to bail out banks…[and] it even funds it through a special new tax.” The FDIC, or the Federal Depository Insurance Commission, said it will not enact a tax to fund the bank bailouts, yet Calomiris said, “that is not very credible.”

Flannery identified two different types of ‘Too Big to Fail’ banks: those with “explicit government support” and those with the government’s “implicit support.” As a result, this “contingent support” ensures that taxpayers are on the hook for these bank bailouts. A large problem with big banks are how their “loss absorbing capacity” varies from bank to bank, which means that each bank has a level of being able to absorb debt and survive in the banking industry.