Too big to fail Paul Wright Senior Director
Too big to fail? Paul Wright Senior Director, IIF May 21, 2010
Background • Failing firms and structures can create systemic damage • The expectation that they will be bailed out: § Creates moral hazard § Distorts markets § Makes governments defensive
Characteristics of systemic risk • Varied in form • Dynamic and mutating in nature • Highly time- and condition-dependent Large firms can be a source of systemic risk but it is a mistake: • To assume that systemic risk originates only in firms • To equate greater size with more systemic risk
Balance is needed Well run global firms bring huge benefits • Support the functioning of the global economy § Match global savings and investments § Support transactions and make markets § Facilitate growth of regional and global companies • Provide benefits through economies of scale and scope § Some business requires absolute scale § Costs to consumers § Leading edge practices • Contribute to overall resilience § Resolving failing firms § Source of resilience in emerging markets § Filling funding gaps
Balance is needed • Systemic risk is a serious problem that must be addressed • But it doesn’t stem only (or even mainly) from individual large firms • In seeking solutions, don’t undermine the global economy
‘Conventional’ measures 1 Reduce the probability of failures • Improved industry practices • Stronger capital and liquidity requirements • Recovery plans • Better supervision (including cross border)
‘Conventional’ measures 2 Reduce the impact of failures • More resilient markets • CDS, OTC, securitization • Recovery and resolution plans (‘living wills’) • Cross border resolution groups
‘Conventional measures’ 3 Improve resolution arrangements • Strengthen national resolution arrangements • Introduce special resolution regimes, including steps to preserve value • Coordinate/harmonize national regimes
Take stock at this point • Has systemic risk been reduced to acceptable levels? • Can global firms be resolved? • Can we credibly say that taxpayers’ money will never be used? § No bailouts § No recapitalizations
Taking stock Will systemic risk have been acceptably reduced? Can global firms be resolved? Can we credibly say that taxpayers’ money will never be used? Yes No/not yet Unconventional measures Declare victory Sleep soundly at night Limitations on firms: § Size § Scope § Structure or More ambition in cross border resolution
More ambition is needed • A global approach to resolution • This is very difficult – but the stakes are high • Critical issue is allocation of assets and liabilities • Call for a G 20 Taskforce
For more on this (on May 24) www. iif. com A Global Approach to Resolving Failing Financial Firms: An Industry Perspective and Systemic Risk and Systemically Important Firms: An Integrated Approach
Too big to fail? Paul Wright Senior Director, IIF May 21, 2010
- Slides: 13