Beyond "Too Big To Fail"  

A blog about business and economics.
May 3 2013 3:34 PM

Tarullo: There's More To Bank Regulation Than "Too Big To Fail"

137288057.jpg.CROP.rectangle3-large
Dan Tarullo

Photo by Alex Wong/Getty Images

Federal Reserve governor Dan Tarullo did a very interesting speech on bank regulation today that I'm still digesting. But as the Brown-Vitter bill brings new attention to the question of breaking up the largest banks, I did particularly welcome his observation that there's more to financial regulation than simply thinking about TBTF institutions:

However, note that while the presence of too-big-to-fail institutions substantially exacerbates the vulnerability created by the new system, they do not define itslimits. Even in the absence of any firm that may individually seem too big or too interconnected to be allowed to fail, the financial system can be vulnerable to contagion. An external shock to important asset classes can lead to substantial uncertainty as to underlying values, a consequent reluctance by investors to provide short-term funding to firms holding those assets, a subsequent spate of fire sales and mark-to-market losses, and the potential for an adverse feedback loop. An effective set of financial reforms must address both these related problems of too-big-to-fail and systemic vulnerability.
Advertisement

The point here is that you could have cascading waves of bank failure even if none of the banks was particularly large, and the risk of such a cascade would naturally raise the bailout question in just the way that a "too big to fail" bank does. The TBTF issue is like a large barnacle attached to the problem of adequate bank regulation, but it's not the problem itself. In fact if you look at it, the financial crisis has been associated with tons of failures of small banks, and even though the FDIC resolution mechanism isn't a "bailout," it raises a lot of basically similar questions about moral hazard and incentives.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

TODAY IN SLATE

Politics

Don’t Worry, Obama Isn’t Sending U.S. Troops to Fight ISIS

But the next president might. 

The Extraordinary Amicus Brief That Attempts to Explain the Wu-Tang Clan to the Supreme Court Justices

Amazon Is Officially a Gadget Company. Here Are Its Six New Devices.

The Human Need to Find Connections in Everything

It’s the source of creativity and delusions. It can harm us more than it helps us.

How Much Should You Loathe NFL Commissioner Roger Goodell?

Here are the facts.

Altered State

The Plight of the Pre-Legalization Marijuana Offender

What should happen to weed users and dealers busted before the stuff was legal?

Surprise! The Women Hired to Fix the NFL Think the NFL Is Just Great.

You Shouldn’t Spank Anyone but Your Consensual Sex Partner

Moneybox
Sept. 17 2014 5:10 PM The Most Awkward Scenario in Which a Man Can Hold a Door for a Woman
  News & Politics
Altered State
Sept. 17 2014 11:51 PM The Plight of the Pre-Legalization Marijuana Offender What should happen to weed users and dealers busted before the stuff was legal?
  Business
Business Insider
Sept. 17 2014 1:36 PM Nate Silver Versus Princeton Professor: Who Has the Right Models?
  Life
Outward
Sept. 17 2014 6:53 PM LGBTQ Luminaries Honored With MacArthur “Genius” Fellowships
  Double X
The XX Factor
Sept. 17 2014 6:14 PM Today in Gender Gaps: Biking
  Slate Plus
Slate Fare
Sept. 17 2014 9:37 AM Is Slate Too Liberal?  A members-only open thread.
  Arts
Brow Beat
Sept. 17 2014 8:25 PM A New Song and Music Video From Angel Olsen, Indie’s Next Big Thing
  Technology
Future Tense
Sept. 17 2014 9:00 PM Amazon Is Now a Gadget Company
  Health & Science
Medical Examiner
Sept. 17 2014 11:48 PM Spanking Is Great for Sex Which is why it’s grotesque for parenting.
  Sports
Sports Nut
Sept. 17 2014 3:51 PM NFL Jerk Watch: Roger Goodell How much should you loathe the pro football commissioner?