Is “Too Big To Fix” Driving Us Off Another Cliff?

John Plender has an interesting article on FT where he lays out the case that Europe and the UK has not really addressed the issues that led to the great recession and that we may just be headed for another banking crisis in the not too distant future.

He writes:

It follows that on current policy another financial crisis is probable. And since it is clear that there is no political will for further bailouts in the US, little at the German heart of the eurozone and limited fiscal capacity for bailouts in the UK, a new crisis would be much more damaging to the world economy. In effect, the UK and much of the eurozone appear determined to repeat the mistakes that inflicted stagnation on Japan for the past 23 years, but with more financial risk.

He gives multiple reasons for his position, but in the end it comes down to a feeling that regulators have not done enough (a) to unwind the “too big to fail” structures of the top global financial institutions (i.e., have not reduced the cause of risk) and have not really designed and tested the mechanisms to handle the fallout of  such a scenario (i.e., have not put in place sufficient risk mitigation).

His views are echoed by many in the US, of course, and when one looks at the progress (or lack thereof) of the implementation of Dodd-Frank in the US. A good piece by USA Today (building on a recent report from the law firm Davis-Polk) detailed just how much effort has gone into lobbying and delaying the implementation of the thousands of rules that Dodd-Frank sought to put into place after the meltdowns.


As  the USA Today article notes:

The reasons behind that delay are a testament to the well-funded opposition of the finance-industry lobby, plus legal battles and resistance in Congress. The lag also owes partly to the challenges the 848-page bill poses for a regulatory system in which multiple federal agencies with sometimes conflicting views are tasked with shepherding the complex legislation into final rules.

As for the Volcker Rule, one of Dodd-Frank’s most contested proposals, roughly 85% of 253 Washington meetings with regulators since they issued the provision in late 2011 featured finance industry representatives challenging it, a USA TODAY review of electronic meeting logs shows….

“We had a system that was broken … and the fundamentals within that system haven’t changed,” said Neil Barofsky, the former inspector general who oversaw spending of federal bailout funds. “The question is not if” the U.S. faces another financial disaster, he warned, “it’s when.”

So, over in Europe they continue to struggle with a common approach to banking regulation and risk management. In the US, we delay with putting in the (already watered-down) rules that were meant to prevent another great recession. Overall, it seems that many global financial institutions were not only “too big to fail” but too big to fix.

Read the FT piece here:

Read the USA Today piece here:

Carlos Alvarenga

Founder and CEO at KatalystNet and Adjunct Professor in the Logistics, Business and Public Policy Department at the University of Maryland’s Robert E. Smith School of Business.

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