Wednesday, June 29, 2011

SIFIs and Capitalism

Thomas Hoenig garnered a bunch of headlines the other day for, as usual, making a provocative and hyperbolic statement about financial reform. Discussing the concept of systemically important financial institutions (known as SIFIs), Hoenig said:

“I suggest that the problem with SIFIs is they are fundamentally inconsistent with capitalism. They are inherently destabilizing to global markets and detrimental to world growth. So long as the concept of a SIFI exists, and there are institutions so powerful and considered so important that they require special support and different rules, the future of capitalism is at risk and our market economy is in peril.”
Oh no! The future of capitalism itself! Not surprisingly, Hoenig doesn’t explain this bizarre assertion; he just makes the provocative statement and moves on, which is par for the course for him. Of course, anyone who understands this issue beyond the level of superficial sound-bites knows that Hoenig’s claim is ill-informed nonsense.

It’s true that SIFIs are subject to “different rules” — they’re subject to more stringent regulations, and to more conservative capital requirements. They’re subject to a prompt corrective action (PCA) regime, liquidity requirements, resolution plans, enhanced public disclosures, and additional stress tests. (I know what you’re thinking: “How did the big banks convince Congress to shower them with all these goodies? Is there no end to the corruption?”)

SIFIs are also likely (though not automatically) subject to the Title II resolution authority, which makes it easier for SIFIs to fail. The Title II resolution authority mirrors the FDIC’s resolution authority for commercial banks, except Title II is more stringent — e.g., unlike the resolution authority for commercial banks, Title II doesn’t permit “open-bank assistance” for SIFIs. And back during the nationalization debate, Hoenig was absolutely convinced that the resolution authority could successfully wind-down even the largest, most complex financial institutions.

So if SIFIs can in fact fail just like any other bank under the new resolution authority (which Hoenig has said they can), and the only difference between SIFIs and other banks is that SIFIs are subject to more stringent regulations, how exactly are SIFIs threatening the future of capitalism? The answer, of course, is that they’re not. This is just Hoenig looking to get in the papers by saying something mean about the Big Banks.

Just remember that Hoenig is also the guy who’s been warning about runaway inflation for the past two years, and who thinks the Fed shouldn’t “bring [unemployment] down too rapidly.” So take him seriously at your own peril.


Anonymous said...

PCA has been a bank capital evaluating regime for all banks and savings institutions since the 1989 FIRREA act. It is not a different requirement for SIFIs. Looks like SIFIs will have to keep an enhanced capital cushion but what the hell, repos are the ultimate "hot deposits."

Unknown said...

I think Hoenig's recent point is that the mere existence of a SIFI is a problem. There shouldn't need to be a class of banks that require special support and rules (even *more stringent* rules), and even under special resoultion, they are much more troubling to wind-down.

TBTF implied too big to exist. Without rehashing EoC vs. Yves, does SIFI fix all of those risks to satisfaction? No, it does not.

Should the U.S. taxpayer backstop, or even allow, a global payments network attached to cross-guaranteed U.S. and foreign deposit banks attached to an investment bank attached to proprietary hedge fund attached to a massive derivatives creation & clearing operation? I would argue no, and certainly no discount window access. Bank = bank only.

Q: What are EoC's thoughts on reinstating Glass-Steagall?

Anonymous said...

I'm not an economist and know very little about the true workings of the financial system. It appears from my perspective that very large corporations and banks have become too large to be controlled by a single country. The defect of globalization is the lack of a supranational governing structure.

Chrevron is nice when it does business in the U.S. but not in Ecuador. When capital can be moved easily from country to country then threat of large corporation A relocating to another country becomes real. Governments will compete to become the most business friendly (least regulation).

Capitalism appears to be a bad system when negative externalities aren't properly dealt with. Right now they don't appear to be properly dealt with.

I don't think Dodd-Frank will do much because it's only as good as the enforcers. The top leaders in our financial system all come from top banks. It's a revolving door. Spend a few years at Treasury and then a few at some large institution.

Well, this is how I see things but I'm not in the know. From my perspective we need a new system.

Main Street Muse said...

Had no idea that TBTF is now known as SIFI - interesting moniker for banks that are now even bigger than the TBTF institutions that crashed the economy in 2008.

Seems to me that SRI-FI would be better - a reminder that these banks are "systemically risky" financial institutions; let's place the emphasis on the risks they pose, not their "importance."

When all is said and done (and we have not reached the point of being all said and done on this issue yet, as I understand it), SIFIs may indeed be able to fail - enter bankruptcy - without collapsing the economy - but in that the systemic risk they pose remains high enough to warrant special treatment, I still do not understand how such a failure won't be like crying "fire" in a crowded theater. Panic is hard to legislate around, and bankers facing a run on their bank have been shown to be even more emotionally fragile than Brittany Spears.

And seeing that the heads of SIFIs move easily between the banks and positions of power in Washington, enhancing their "importance" even more, I remain skeptical of the ability of those in power to stop SIFIs from throwing the economy of a cliff once again.

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