Abstract
In the wake of the global financial crisis that erupted in 2008, there has been extensive commentary and regulatory focus on the ‘Too Big to Fail’ issue. In this paper, we survey the proposed solutions and regulatory initiatives that have been undertaken. We conduct a longitudinal analysis of major U.S. banks in four discrete time periods: pre-crisis (2005–2007), crisis (2008–2010), post-crisis (2011–2013) and normalcy (2014–2016). We find that risk metrics such as leverage and volatility which spiked during the crisis have reverted to pre-crisis levels and there has been improvement in the proportion of equity capital available to cushion against asset value deterioration. However, banks have grown in size and it does not appear as if their business models have been redirected toward more traditional lending activities. We believe that it is premature to conclude that ‘Too Big to Fail” has been solved, but macro-prudential regulation is now much more effective and, consequently, banks are on a considerably sounder footing since the depths of the crisis.
Highlights
In testimony before the Financial Crisis Inquiry Commission in 2010, Federal Reserve chair Ben Bernanke stated: “A too-big-to-fail firm is one whose size, complexity, interconnectedness, and critical functions are such that, should the firm go unexpectedly into liquidation, the rest of the financial system and the economy would face severe adverse consequences
In his letter to shareholders, contained in JPMorgan Chase’s 2016 annual report, Chairman and CEO Jaime Dimon asserted: “Essentially Too Big to Fail has been solved—taxpayers will not pay if a bank fails.”2 In contrast, Sarin and Summers (2016, p. 1) express concerns that despite various regulatory initiatives to rein in excessive risk taking “financial market information provides little support for the view that major institutions are significantly safer than they were before the crisis and
We focus on twelve U.S banks classified into three tiers: top (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo)5, middle (Bank of New York Mellon, State Street, US Bancorp, PNC Financial Services Group)6 and low (Capital One Financial, BB&T, SunTrust Banks, Regions Financial)
Summary
In testimony before the Financial Crisis Inquiry Commission in 2010, Federal Reserve chair Ben Bernanke stated: “A too-big-to-fail firm is one whose size, complexity, interconnectedness, and critical functions are such that, should the firm go unexpectedly into liquidation, the rest of the financial system and the economy would face severe adverse consequences. We focus on twelve U.S banks classified into three tiers: top (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo), middle (Bank of New York Mellon, State Street, US Bancorp, PNC Financial Services Group) and low (Capital One Financial, BB&T, SunTrust Banks, Regions Financial). The reason for this bifurcation is because they face a descending level of regulatory scrutiny based on their total assets.
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