the six largest U.S. financial institutions are significantly bigger than they were before the financial crisis. These banks now have assets worth over 66 percent of gross domestic product — at least $9.4 trillion, up from 20 percent of GDP in the 1990s…Here’s how Huntsman wants to kill TBTF and break the crisis-bailout-crisis-bailout cycle:
1. Set a hard cap on bank size based on assets as a percentage of GDP. (This cap would be on total bank size, not using any of the illusory “risk-weights” currently central to thinking about bank accounting. The lowest risk assets for banks in Europe, supposedly, are sovereign debt — yet this very same debt is now at the heart of the current crisis.
2. We should have a similar cap on leverage — total borrowing — by any individual bank, relative to GDP.
3. Explore reforms now being considered by the U.K. to make the unwinding of its biggest banks less risky for the broader economy.
4. Impose a fee on banks whose size exceeds a certain percentage of GDP to cover the cost they would impose on taxpayers in a bailout, thus eliminating the implicit subsidy of their too-big-to-fail status. The fee would incentivize the major banks to slim themselves down; failure to do so would result in increasing the fee until the banks are systemically safe. Any fees collected would be used to reduce taxes for the broader non-financial corporate sector.
5. In addition, focus on establishing an FDIC insurance premium that better reflects the riskiness of banks’ portfolios. This would provide an incentive for banks to scale down, allowing the financial system to absorb them organically in the event of a collapse.
6. Strengthen capital requirements, moving far beyond what is envisaged in the current Basel Accord. The Accord is a mixture of regulatory oversight and political compromise. As a result, the U.S. has allowed its banking policy to be determined by the “least common denominator” among European and Asian countries, many with a long history of not being prudent.
The Dodd-Frank monstrosity is a “full employment act for regulators” that fails to address fundamental issues of risk and transparency. At 1/10th the length of Dodd-Frank, the Glass-Steagall Act did a fine job until its repeal a decade ago. We’re inclined to bring it back.