While I find Yale Law professor Jonathan Macey’s proposal over at Politico for responding to the financial crisis emotionally appealing:
For only one structural change could work: We need to break up the banks into sufficiently small pieces that are no longer too big to fail, and instead are too small to rescue. Banks’ liabilities are easiest to deal with when limited to a reasonable size.
No financial institution should have liabilities greater than 5% of the value of the FDIC insurance fund so that a failure won’t roil too large a portion of the economy.
For the same reason, a financial institution’s debt should never be greater than 80% of its assets. If it gets larger, regulators need to put it into receivership. This insures that there will be plenty of stockholder’s equity available to creditors, so the government is not be left to pick up the tab.
I wonder if the professor appreciates the problems that would produce. I’ve said “if they’re too big to fail, they’re too big to exist” more than once myself but I also recognize that if U. S. banks are to compete with their much larger competitors in the international market breaking banks into more digestible pieces isn’t sufficient.
We’re facing a global problem and it must be faced with a global solution. If gargantuan banks are the only things that can provide adequate service for multi-national companies, should we be turning our attention to those, too? If “too big to fail” is a problem, why isn’t “too big to finance”? How should nations deal with global banks and global companies?
Why? Explain why banks have to be big to compete internationally?