Thursday, October 11, 2012

Not Too Big To Fail

Said Fed Governor Daniel Tarullo:
"Bank stability's hitting a new low.
We must limit the size
Of those mega bank guys,
Since our power to save them is too low."

The Fed's thought leader on bank policy believes that regulators should address the problem of too-big-to-fail banks by directly limiting their size. In a speech at the University of Pennsylvania Law School, Federal Reserve Governor Daniel K. Tarullo laid out his thoughts on safeguarding the stability of the financial system. Mr. Tarullo, whose day job is that of Professor of Law at Georgetown University, suggests that banks may not grow too big to fail if their non-deposit liabilities are limited to a fixed percentage of the nation's GDP. Such liabilities would include interbank borrowing and other short- and long-term debts, but not customer deposits.

Notwithstanding the appealing simplicity of Mr. Tarullo's proposal, a banking industry spokesman warned of "unintended consequences." In this case, one has to wonder if he isn't more concerned about the intended consequences.

Hat tip to Sallie Krawcheck.

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