After the Crisis: Revisiting the "Banks are Special" and "Safety Net" Doctrines

Abstract

The idea that banks are special was most succinctly summarized by Gerald Corrigan more than 30 years ago in an analysis prepared for the Federal Reserve Bank of Minneapolis, where Corrigan was president at the time. With the help of his mentor, then Federal Reserve Chairman Paul Volcker, his analysis pondered the characteristics of banks that make them special; justified the provision of a supporting safety net for banks based on financial stability concerns; and detailed the costs and restrictions that banks must subject themselves to. But the years since Corrigan's analysis have seen two severe financial crises, and as the crisis of 2007?2009 clearly revealed, banks are not special, as the safety net was applied to a wide range of nonbank institutions. The Dodd-Frank Act was intended to cut back on the safety net by giving financial authorities wide discretion, but the right approach to rein in the safety net would be to cut back its beneficiaries.