Structural Solutions: Blinded by Volcker, Vickers, Liikanen, Glass Steagall and Narrow Banking
Forthcoming, early in 2015 in: "Too Big to Fail III: Structural Reform Proposals - Should We Break Up the Banks?", edited by Patrick S. Kenadjian and Andreas Dombret, Book XVI, 244 S. Hardcover, de Gryuter ISBN 978-3-11-042605-2.
20 Pages Posted: 19 Dec 2014 Last revised: 23 Dec 2014
Date Written: November 1, 2014
The paper analyzes the various structural solutions proposed by regulators in the US, UK and the European Union presented as the key to solving the problem of “too big to fail” (TBTF) banks. These come in three main varieties, one in the United States (the Volcker Rule), one in the United Kingdom (the Vickers Report) and one in the European Union (the Liikanen Report). The problem they seek to address is real. It is the dilemma faced by public authorities when confronted with the potential failure of a financial institution that could result in destabilizing the financial system in a country or region under conditions of uncertainty and in the absence of appropriate tools to contain the adverse consequences of failure on the financial system and the broader economy. The authors present why the “structural solutions” proposed are illusory, at best are complementary to other more targeted measures being actively pursued, and at worst divert valuable attention and resources away from more targeted solutions. The more targeted measures include increases in the capital and liquidity requirements decided upon by the Basel Committee on Banking Supervision in the package of reforms known as Basel III and the development or expansion of resolution regimes and strategies such as the single-point-of-entry (SPOE) strategy in the US, the UK, France, Germany and at the Community level in the EU. These are the real solutions to TBTF because they aim to reduce both the risk of failure of financial institutions, based on an analysis of what caused the failures in 2008/2009 (through the Basel III reforms), and the loss given failure through the adoption of appropriate resolution regimes which would allocate losses upon failure to existing investors in the failed institutions without fostering contagious panic, thus preventing the failure of one institution from having systematic consequences.
Keywords: Banking, Too-Big-to-Fail, Financia Crisis, Volcker Rule, Single-Point-of-Entry, Basel III, Cross-Border Regulation
JEL Classification: G20, G21, G28, G33, G38, F30, F36, F23, F00, F01, F02
Suggested Citation: Suggested Citation