Article

2016-04-21 Economy

How Europe Fixed Its Too-Big-to-Fail Problem

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Posted by Steve White 2016-04-21 00:00|| || Front Page|| [3 views ] Top

#1 barring banks from crisis-inducing behavior was the best remedy

But it doesn't explain why. The problem is perverse incentives. If crises come along every 20 years, then if you are a banker who gets a yearly bonus based on performance, your best strategy is to take big risks, because you will make big bonuses for 19 years, then make none and could well get fired in the 20th year. So what. You've already made a pile of money in the preceding 19 years.

The solution is to bar everyone from trading derivatives etc, except those who trade with their own money or money from people who have explicitly signed on for this trading. The Lloyds of London model.

BTW, the size of the bank is immaterial. It's the size of the failure that matters.

Posted by phil_b 2016-04-21 04:55|| 2016-04-21 04:55|| Front Page Top

#2 ...except those who trade with their own money or money from people who have explicitly signed on for this trading.

No margin. No banks that are FDIC'd.

Posted by Procopius2k 2016-04-21 10:14|| 2016-04-21 10:14|| Front Page Top

#3 End FDIC & there will be a huge run on banks. Banks pay virtually no interest now, so why bother to maintain a bank balance?

Posted by Anguper Hupomosing9418 2016-04-21 14:56|| 2016-04-21 14:56|| Front Page Top

#4 I see the perverse incentives problem is recognized, and the regulators plan to address it through bonus deferral and clawback rules.

Link

Posted by phil_b 2016-04-21 17:55|| 2016-04-21 17:55|| Front Page Top

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