‘Too big to fail’ may be the lesser of two evils

China Daily (Canada) - - LIFE -

Re­forms to bet­ter pre­pare the world’s 30 big­gest banks for times of cri­sis should cer­tainly be high on the agenda of G20 lead­ers who will meet next week in Tur­key. But the con­tin­u­ing flood of cheap money poses an even greater threat to global fi­nan­cial sta­bil­ity and eco­nomic growth that the G20 lead­ers must work to­gether to fix.

As the global econ­omy is bracing for the weak­est an­nual growth since 2009, it is surely ur­gent for the in­ter­na­tional com­mu­nity to take pre­emp­tive mea­sures that will al­low a global sys­tem­i­cally im­por­tant bank to fail with­out cre­at­ing the kind of mar­ket may­hem as the bank­ruptcy of Lehman Broth­ers did in 2008.

The rec­om­men­da­tion by the Fi­nan­cial Sta­bil­ity Board, which advises G20 coun­tries on bank­ing re­form, that big banks should raise up to 1.1 tril­lion eu­ros (about $1 tril­lion) of ad­di­tional cash to en­sure their own sur­vival should dis­as­ter strike again there­fore de­serves se­ri­ous con­sid­er­a­tion.

But the need toend“too big to fail” so as to pro­tect tax­pay­ers fromhav­ing to foot the bill of bank­ing bailouts again does not nec­es­sar­ily make th­ese banks the sole or the ul­ti­mate cause of a global fi­nan­cial tsunami or eco­nomic re­ces­sion.

In­stead, when­such banks be­gin to ac­cu­mu­late toomany as­sets which­may prove risky for them­later, it is not only­bankers but also the bank­ing reg­u­la­tor­sand­mon­e­tary pol­i­cy­mak­ers that should con­sider the risks.

Un­for­tu­nately, wide­spread su­per loose­mon­e­tary poli­cies, es­pe­cially in ma­jor de­vel­oped economies, clearly in­di­cate a lack of con­sen­sus among­global pol­i­cy­mak­ers.

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