The ways to solve the problem of ‘too big to fail’-解决“大而不倒”问题的方法

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04-04, 2014

The ways to solve the problem of ‘too big to fail’
解决“大而不倒”问题的方法

Introduction 引言

Since 2007, the financial crisis in the world which was caused by the subprime mortgage crisis in the United States happened. In the global financial crisis, many banks were about to go bankrupt. However, as a result of these banks’ dominant position in the economic market, the bankruptcies are not allowed by the government. So many investment banks such as Bear Stearns and commercial banks, Bank of America (BAC), Citigroup (C), and JP Morgan Chase (JPM) are ‘too big to fail’ during the crisis (Alton E. Drew, 2009). But several scholars think that the ‘too big to fail’ policy disrupt the market economic order, and cause a lot of economic loss. This essay will firstly discuss what ‘too big to fail’ is and the problems which are caused by it. Following this, it will give a few ways to solve the problem of ‘too big to fail’ according to economic theories and the views of several scholars. Particularly, it will explain what the ‘narrow banking’ is, and evaluate effect of ‘narrow banking’ on the ‘too big to fail’.
自2007年以来，世界上的金融危机是由美国次贷危机引起的。在全球金融危机的影响下，不少银行即将倒闭。然而，由于这些银行在经济市场的主导地位，破产不被政府允许。因此，许多投资银行，如贝尔斯登和商业银行，美国银行（ BAC ），花旗集团（C ），和JP摩根大通（JPM ）是“大而不倒”的危机（奥尔顿E.德鲁， 2009）中。但一些学者认为“太大而不能倒”的政策破坏市场经济秩序，造成大量的经济损失。本文将首先讨论什么是“大而不倒”是和由它引起的问题。在此之后，它会给一些方法，根据经济理论和几位学者的意见，以解决“大而不倒”的问题。特别是，这将解释什么是“狭义银行”是，并评估“大而不倒”，“狭义银行”的影响。

Situation analysis 情形分析

‘Too big to fail’ 大而不倒

The phrase of ‘too big to fail’ sometimes is described as the ‘too large to fail’, ‘too interconnected to fail’, or ‘too international to fail’. The phrase of ‘too big to fail’ refers to a phenomenon. In economics, some largest and most interconnected businesses are so large that a government can not allow them to fail (Andrew Ross Sorkin, 2009). Firstly, these companies are very large in size. And the failure of these companies would cause a lot of unemployed persons, and affect the stability of the social. Secondly, many of these companies occupy a dominant position in the national economy. So the bankrupt of a large corporation will do harm to the confidence of economic development. Finally, large companies generally have a lot of debt, if the enterprises go bankrupt, and the impact on the banks will be great. Therefore as a number of reasons, the government will not allow the bankrupt of these companies. The essence of the problem is size and influencing of the institutions for the bankrupt of large and interrelated institutions can do great harm to development of economy and society. The meaning of this phrase is that the bankrupt of these enormous corporations might cause continuous depression in economy, and therefore the government would intervene in this event through several actions like financing and monetary. The phrase has also been broadly applied to represent a government's policy, which bails out the corporations being about to bankrupt.#p#分页标题#e#

“大而不倒”这句话有时被描述为“太大而不能倒” ， “太相互联系而不能失败”或“太国际而不容易失败” 。“大而不倒”这句话指的是一种现象。在经济学中，一些规模最大，最具互联企业是如此之大，政府不能让他们倒闭（安德鲁·罗斯·索尔金， 2009）。首先，这些公司都是非常大的规模。而这些企业的失败会导致很多失业人员，并影响到社会的稳定。其次，很多这些公司占据国民经济的主导地位。因此，破产的大公司会损害经济发展的信心。最后，大公司一般都有大量的债务，如果企业破产，以及对银行的影响将是巨大的。因此，作为一个多种原因，政府将不会允许这些企业破产。问题的实质是大规模机构破产会极大地损害经济和社会的发展。这句话的意思是，这些破产企业的巨大可能导致经济持续低迷，因此政府将通过类似的融资和货币等动作介入此事件。这句话也被广泛地应用到代表政府的政策，拯救出破产的公司。

Some scholars think that the policy of ‘too big to fail’ is wrong and counterproductive. They think that if the banks’ management and risk control are not effective, these big banks should be left to fail.

The consequences of ‘too big to fail’ “大而不倒”的结果

Firstly, the economic damage by the ‘too big to fail’ is very large. The direct consequence is the increase of the cost for taxpayers. ‘Too big to fail’ increases an artificial advantage to large banks. Although these large banks can not provide excellent products and services as people expect, they will not bankrupt as a result of the ‘too big to fail’ policy. ‘Too big to fail’ is propitious to establish large organizations or banks. Banks don’t chase for innovation and development of productions and service for this process is difficult and complex. However, banks try to be the largest one in one country through ineffective extension and development for they can depend on policy of ‘too big to fail’. Even the largest bank face bankruptcy, the country will save it for development of economy and society. And this is not propitious to scientific and technological progress. At the same time, it encourages adventure, and catalyzes the employment of risk takers in large retail institutions. All of these activities add the risk of the bank funds. During the risk investment, as the presence of the ‘too big to fail’, the senior management can focus on trading activities at the expense of customer service. Many of the losses are caused in this way as a result of the ‘too big to fail’.

Secondly, ‘too big to fail’ is incompatible with democracy. In market economy, commercial success and democratic elections should be the only source of legitimate authority. However the ‘too big to fail’ gives these large companies an artificial authority which make people believe that the credibility of these companies is guaranteed. And some organizations may get an unaccountable concentration of power, without going through the two ways above. Just as people see today, Citigroup, Barclays and Deutsche Bank are of this kind (John Kay, 2009).#p#分页标题#e#

Thirdly, ‘too big to fail’ also destroys the order of the market economic. However the order is the central achievement of the market economy. In principle, innovations and radically new business models should come from large, established, dominant companies. However in practice, as a result of the bureaucratic culture of these big organizations, such things rarely happen in these big organizations. Revolutions in business generally come from new entrants. That is why so many of today's market leaders (such as Microsoft and Google, Vodafone and Easyjet) did not exist a generation ago. These companies can not succeed if governments had been always supporting the continued leadership of IBM and AOL, AT&T and British Airways. Any form of the support from of the government distorts competition. To win such subsidy today, the companies concerned must be both large and unsuccessful just like General Motors and Citigroup. The damage to the innovation and progress of the ‘too big to fail’ doctrine is so big that there are few policies can do this.

And what’s more, in a few cases, some banks are not too big to fail, but too big and can not be saved. As a result of the limited assets of some countries, sometimes the financial institutions deemed too big to fail turned out to be too big and can not be saved. This happened in Iceland in September-October 2008. The four international banks have all defaulted on their debts in Iceland right now. And it could happen in other places. For the US banks and most Euro Area banks, many of the banks’ top managers think that they are too big to fail. So they arbitrarily play their cards, and extract the maximum amount of benefit from the hapless tax payer. All these activities are harmful to the security of the bank savings.

The ways to solve the problem of ‘too big to fail’

In sum, the policy of ‘too big to fail’ may cause lots of consequences. However, as the companies occupy the dominant position in the national economy, the bankrupt of these companies will do damage to the economic. So many suggestions have been put forward by the economists to prevent ‘too big to fail’ problem.

Mervyn King is the governor of the Bank in England. He called for the banks that are ‘too big to fail’ should be cut down in size (Jill Treanor, 2009). However, Alastair Darling disagreed with this opinion. He said, ‘The big banks are so important to the financial system that they can not be allowed to fail. And right now many people talk about how to deal with the problem. But the solution is not as simple as someone has suggested. It can not be solved only by restricting the size of the banks’ (Andrew Porter, 2009). Willem Buiter proposes the government should tax to the large institutions (Willem Buiter, 2009). ‘When size creates externalities, what would you do without any negative externality? Several scholars think it should be taxed. Several scholars think it is necessary to increase regulation of bank risks through some limitations (Mervyn King, 2009). John Kay does not believe that regulation can solve this problem (John Kay, 2009).#p#分页标题#e#

This essay thinks that countries can solve the problem of ‘too big to fail’ through the following ways. Firstly, governments should supervise the management and risk of banks through fiscal or monetary policies. However, regulatory only can not prevent the banks from entering the financial crisis. These regulatory measures proved to be not just inadequate, but also massively inadequate for the problems faced. Worse, many of the dangers reflected that many institutions attempt to escape from the regulation. So regulation is not the answer to this problem, and it has been always part of the problem. So what is the answer? Mr. Kay's answer is to divide the banking into a ‘public utility banks’ and a ‘casino banks’. The big idea is that the insured deposits will be ‘genuinely safe liquid assets’ which should be backed by 100 percent banking reserve fund. In practice, these assets would be government bonds. This is the most rigorous form of public utility banks which is with the same meaning of the ‘narrow banking’ (Martin Wolf, 2009). Secondly, banks can be divided into two parts like a ‘public utility banks’ and a ‘casino banks’. The public utility banks can provide the ordinary service of bank. The casino bank can provide investment services. Thirdly, governments also adopt several policies like tax to control the scale of banks. This can be done through capital requirements. And the capital requirements are progressive in the size of the business (such as measured by value added or the size of the balance sheet). Such measures should be distinguished from regulatory interventions which aim at regulating risk (regardless of size, except for a lower limit).

Narrow banking

Narrow banking is often described as ‘a new Glass-Steagall’. The Glass-Steagall Act which is passed in the US in 1933 demands the separation of investment banking and commercial banking. The most famous consequence resulted from it was the division of the House of Morgan into a commercial bank (J P Morgan) and an investment bank (Morgan Stanley). The meaning of the expression ‘a new Glass-Steagall’ is the separation of utility banking and casino banking (John Kay, 2009).

This essay thinks that the policy of ‘narrow banking’ can solve the ‘too big to fail’. It suggested that people should divide the banking into a ‘public utility banks’ and a ‘casino banks’. The ‘public utility banking’ will accept only retail deposits on the liability side. And it would guarantee the retail payment, clearing and settlement system. And it also needs to deposit banking. And the retail deposits can be guaranteed. These narrow banks are tightly regulated by the regulations, and they would not be able to engage in other banking and financial activities. And at the same time other financial institutions (such as Investment Banking) would not be able to use deposits in elsewhere on demand.#p#分页标题#e#

Narrow banking implies the banking institutions focused on the traditional functions, which means that the financial system offers funds to the non-financial economy-payments systems. The traditional functions of the narrow banks include payments systems for all kinds of institutions and deposit taking systems from individuals or small and medium-sized enterprises. Only concentrating on these activities, the banks could be described as narrow banks. Only narrow banks could take deposits from the general public (deposits of less than a minimum amount). Only narrow banks could access the principal payments systems and qualify for deposit protection. However, the policy of ‘narrow bank’ only is not enough for solving the problem of ‘too big to fail’. Firstly, narrow banking can reduce credit and therefore will negatively affect the economic growth. Secondly, narrow banking can eliminate monetary policy. In other words, public debt held by banks would set the money supply. Thirdly, a financial system based on narrow banking could allocate capital efficiently. As a result, it is necessary to adopt other measures in order to solve the problem of ‘too big to fail’, such as regulation and tax

In sum, the meaning of narrow banking is that banks would be forced to hold assets as safe and liquid as their liabilities (Paul de Grauwe, 2009). In this approach, the activities which will increase the risk of the depositors’ savings are not allowed to carry out. Since securitization of loans increases this risk, it will not be allowed, either. Thus, narrow banking aims at minimizing the potential risks of the banking system. These risks of course can not be eliminated, but they can certainly be reduced. Of course, there are other ways of making a system of fractional-reserve banks relatively safe: a stable domestic demand is greater than the supply situation can be achieved roughly the same effect. But it seems obvious regressive

Conclusion 结论

In conclusion, the ‘too big to fail’ can disturb the order of the market economic, and cause economic losses of the national and individual. Therefore, the phenomena of ‘too big to fail’ should be solved as soon as quickly. It is necessary to combine several ways to solve the problem of ‘too big to fail’, such as narrow banking, regulation and tax. The combination of these policies can improve shortcoming of single policy and compensate their shortcomings during solving the problem of ‘too big to fail’. It provides a safe environment for the banking industry.

Reference 参考文献:

Alton E. D. (2009). Banks 'Too Big to Fail'? Wrong. USA: The Business week. http://www.businessweek.com/bwdaily/dnflash/content/feb2009/db20090218_166676.htm#p#分页标题#e#

Andrew R. S. (2009). Too Big to Fail. USA: Penguin Group.

John K. (2009). Why ‘too big to fail' is too much for us to take. Great Britain: The Financial Times.

Jill T. (2009). King calls for banks to be 'cut down to size'. Great Britain: The Guardian.

Mervyn K. (2009). Governor of the bank of England: to Scottish business organizations. Edinburgh.

Andrew P. (2009). Alistair Darling to tell banks and regulators 'no excuses'. Great Britain: Telegraph Media Group.

Willem B. (2009). Should you be able to sell what you do not own? Great Britain: The Financial Times.

Martin Wolf. (2009). Why narrow banking alone is not a solution for finance? Great Britain: The Financial Times.

Paul de G. (2009).The case for narrow banking. Italy: The Collegio Carlo Alberto.

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