Crisis: Ending Too Big To Fail Policy Analysis

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Over the past decade, the “too-big-to-fail policy” has caused a slow deterioration of the US financial system in many ways. This term was coined after the financial crisis of 2008, and is more formally known as the “problem in which regulators are reluctant to close down large financial institutions because doing so might precipitate a financial crisis (Mishkin p.218).” In this situation, the government issues guarantees of settlements of uninsured creditors to large financial institutions. The government does this so that neither the depositor nor the creditor incurs a loss. The transaction is done by the FDIC (Federal Deposit Insurance Corporation) and is completed through the purchase and assumption method. This phenomenon brings up many …show more content…
Mr. Kashkari presented a speech on February 16th, 2016, titled “Lessons from the Crisis: Ending Too Big to Fail”. In his speech, Mr. Kashkari discusses various takes on the too-big-to-fail policy, in which I believe his most vital claim is that he believes “the biggest banks are still too big to fail and continue to pose a significant, ongoing risk to our economy (www.minneapolisfed.org).” Mr. Kashkari also issues a warning that we cannot assume that policymakers will predict the next financial crisis. Just like the financial crisis of 2008, policymakers cannot predict the next crisis that will arise no matter how hard they try. Mr. Kashkari suggests three potential solutions that can mitigate the problem the financial system is having today. The first is to break up larger bank into smaller entities. The second is to force those banks to incur higher amounts of capital to make it so that it is less likely to fail. Finally, the third solution Mr. Kashkari offers is to tax leverage within the US financial system to reduce risk. These solutions offer great potential towards solving the issues of the too-big-to-fail policy and should be considered by the Federal Reserve to review and enact in the near …show more content…
Policymakers did not predict the latest financial crisis of 2008, and the likelihood of them predicting the next crisis is slim. For this reason, continuing to take steps to reduce the too-big-to-fail policy is vital for the US economy. Wall Street Journalist Greg Ip said it best in his article titled “’Too Big to Fail’ Critics Go to Far on Banks” when he claimed the ideal solution to the policy. He believed that large financial institutions should issue large amounts of equity to benefit businesses economies of scale. In his article he states, “U.S. banks are nearly there: Their equity capital equaled 12.5% of risk-adjusted assets in 2014, more than double the 5.5% of early 2009 (http://www.wsj.com).” This idea, along with the solutions mentioned previously, are all steps in the right direction the Federal Reserve can take in regards to mitigating the risk that the too-big-to-fail policy has. Regulators and policymakers must continue to work on reducing these risks, just as they did in 2010 with the Dodd-Frank Act, in hopes of avoiding another financial crisis that will harm the United States economy for a significant amount of

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