The Federal Reserve Bank of Minneapolis hosted its second symposium on its #EndingTBTF initiative on May 16, 2016. The initiative, launched by Reserve Bank President Neel Kashkari in February 2016, seeks to create an actionable plan to end the problem of too big to fail banks (see Banking and Finance Law Daily, Feb. 17, 2016).
The second symposium focused on proposals that seek to address the TBTF problem in two ways: taxing leverage in the financial system and enhancements/alternatives to resolution under the Dodd-Frank Act. Presenters included John H. Cochrane of Stanford University and John Bovenzi of the Bipartisan Policy Center.
Taxing leverage. In the panel discussion on “Taxing leverage in the financial system,” Thomas Philippon, Professor of Finance at the NYU Stern School of Business, gave a presentation that called for narrow banking where deposits are fully backed by the Treasury Department and credit is totally equity financed. The presentation also called for a tax on short- term debt through the use of Pigouvian taxes, which are similar to “sin taxes” imposed on tobacco products and alcohol.
Alternative resolution frameworks. The second panel discussion, which was led by John Bovenzi, explored alternatives to the Dodd-Frank Act’s resolution framework.
A presentation by Bovenzi noted that there were six major developments that provide reasons for optimism in ending TBTF, but that the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the banking industry need to “stay the course;” and the FDIC and Fed need to provide greater clarity and transparency. These two requirements include, among other things, follow through on the living will process and the Fed clarifying its role as a lender of last resort.
The second presentation in the panel discussion was provided by Richard J. Herring, Jacob Safra Professor of International Banking and Professor of Finance, Wharton School, University of Pennsylvania. Herring’s presentation focused on the need for government authorities to have viable alternative to bailouts. He highlighted the issues that arose following the failure of Lehman Brothers in 2008, the steps taken by the G-20 nations to address the failure of systemically important banks, and how the United States is addressing the issue through the enactment of the Dodd-Frank Act.
Companies: Bipartisan Policy Center
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