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