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Panel Detail:

Monday, April 27, 2009
11:00 AM - 12:15 PM

Global Banking: Too Big to Fail or Too Big to Save?

Moderator:

James Barth, Senior Finance Fellow, Milken Institute; Lowder Eminent Scholar in Finance, Auburn University

The banking system as a whole is in better health today than in September 2008, says Robert Kelly, left, of the Bank of New York Mellon Corp. At right is Robert Litan of the Ewing Marion Kauffman Foundation.

Robert Kelly of The Bank of New York Mellon emphasized a theme, echoed by the panel, that the U.S. regulatory regime is structurally challenged. In particular, panelists concurred that it is very difficult to navigate or understand the complex, bureaucratic U.S. regulatory structure. A single systemic regulator would, at least in theory, fix this problem by placing a single office in charge of (systemic) risk management. While panelists generally expressed confidence that the concept will be developed, they agreed that it is not clear who will have the authority to implement it (whether the Federal Reserve or a team of regulators).

Alan Boyce of Absalon and Adecoagro suggested that the current crisis stemmed from the complex, opaque way in which the U.S. banking system securitizes cash flows. He called for a new system, arguing that the current structure is designed primarily to benefit the middleman and not market participants.

Bo Lundgren of the Swedish National Debt Office and Robert Litan of the Kauffman Foundation emphasized the potential benefits that could be realized from carefully analyzing the best practices employed by other nations (e.g., Denmark and Canada). Litan stated his belief that the current economic climate facing banks should not be blamed on the 1999 repeal, by then-President Clinton, of the Glass-Steagall Act, but rather on poor management as it relates to the mortgage market. He suggested that the subprime market was merely a match in the current conflagration; the real fuel was the relatively high degree of leverage employed in the system.

Alan Boyce and Robert Litan noted that the first step in overseeing the banking system will be to determine who makes the list — which institutions will be designated "too large to fail"? Such institutions would then likely be required to maintain higher levels of capital. They also suggest that a primary objective of this new system would be to protect short-term creditors, decreasing the potential ripple effect caused when a key financial institution stumbles or fails.

Kelly also discussed the various financial measures used to analyze the health of financial institutions. Barth, Boyce and Litan emphasized that some banks are relatively strong in terms of select indicators but not in others, and expressed mild disagreement regarding the relative merits of each indicator.

Panelists also discussed the recent stress tests administered by the Federal Reserve for 19 U.S. banks to determine capital adequacy. Kelly expressed serious concerns that if the government were to divulge the firm-level results of these tests, a serious crisis could result. He suggested that short sellers might use this information to engage in further speculation, adding to the problems experienced by already distressed banks. In a brief exchange with Bo Lundgren, Kelly conveyed some optimism about the U.S. banking system. While he agreed that not every bank is in exemplary condition, he believes the system as a whole to be in much better health than it was just last September.

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