Break Up BanksTo make the FDIC resolution powers credible, large banks should have been made small enough and simple enough to fail.
Of course, if we had really done that, we wouldn’t need a resolution authority. When CIT Group failed in the fall of 2009, it had a balance sheet of about $80 billion. There was no bailout, the firm’s debts were restructured, and today it is back in business -- with an appropriately slimmer $48 billion in total assets at the end of the 2011 second quarter.
There were no adverse systemic consequences for the financial system. I’ve talked to many analysts and people active in financial markets, and cannot find any measurable consequences from the CIT failure on the real economy, including on access to credit for their customers, which were small and medium-sized businesses.
Cross-Border BanksThis was a success for the market system: Financial failure led to creditor losses and restructuring, rather than systemic panic. Unfortunately, the resolution powers won’t work for the largest cross-border banks. And bankruptcy for financial institutions would seriously undermine confidence, as happened with Lehman.
The financial system hasn’t become safer since September 2008. We are not in a strong position to weather the financial storms that now appear on the horizon.
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Too Big to Fail Not Fixed, Despite Dodd-Frank: Simon Johnson - Bloomberg