After nearly a decade of crisis, bailout and reform in the United States and the European Union, the financial system — both in those countries and globally — is remarkably similar to the one we had in 2006. Many financial reforms have been attempted since 2010, but the overall effects have been limited. Some big banks have struggled, but others have risen to take their place. Both before the 2008 global financial crisis and today, just over a dozen big banks dominate the world’s financial landscape. And yet the ground is shifting beneath the financial sector, and big banks could soon become a thing of the past.
Few officials privately express satisfaction with the progress of financial reform. In public, most of them are more polite, but the president of the Federal Reserve Bank of Minneapolis, Neel Kashkari, struck a chord recently when he called for a reevaluation of how much progress has been made on addressing the problem of financial institutions that are “too big to fail” (TBTF).
Kashkari worked for Henry M. Paulson in the US Treasury Department, beginning in 2006. He not only watched the financial crisis develop; in October 2008 he became the assistant secretary responsible for the Troubled Asset Relief Program (TARP), with the goal of stabilizing the financial system. He is a Republican who has worked at both Goldman Sachs (a big bank) and PIMCO (a large asset-management company). So people pay attention when he says, “I believe the biggest banks are still too big to fail and continue to pose a significant, ongoing risk to our economy.”
And Kashkari is correct in his assessment of the Dodd-Frank financial reforms of 2010. This legislation and the ensuing regulations have moved some issues in the right direction. “But given the enormous costs that would be associated with another financial crisis and the lack of certainty about whether these new tools would be effective in dealing with one,” he argues, “I believe we must seriously consider bolder, transformational options.”
His call for an evaluation of the TBTF problem will have a major impact for three reasons.
Read the full post at Shanghai Daily.
Simon Johnson is the Ronald A. Kurtz (1954) Professor of Entrepreneurship at the MIT Sloan School of Management, where he is also head of the Global Economics and Management group, a member of the Executive Personnel Committee, and chair of the Sloan Fellows MBA Program Committee.