As your humble blogger previously pointed out, that makes the large global banks Too Big to Regulate too. If the worse that will happen to these banks is a fine and a pantomimed act of contrition, they will continue to behave badly and disregard both laws and regulations.
MIT Professor Simon Johnson was absolutely right with his call to rein in the TBTF. His preferred choice was to break them up. Absent doing this, he has fallen back on the combination of much higher capital levels and resolution authority.
My preferred solution as it is easily implemented globally is to require the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.
I prefer this solution because unlike national regulators the market is both bigger than and not afraid of the banks. Quite simply, with transparency, the TBTF will come under immense market pressure to shrink.
For example, with all of their proprietary bets disclosed, the TBTF become vulnerable to market participants (think hedge funds) engaging in trading activities that minimize the potential for gains on these proprietary bets and maximize the potential for loss. Bankers know that disclosure of their positions is a trader's worse nightmare and as a result would eliminate their proprietary bets.
In addition, once the market participants know what a bank's exposures are, they can independently assess the risk of the bank and adjust their exposure to the bank based on this risk and what the market participant can afford to lose.
This brings an end to the regulatory concern with financial contagion.
Andrew Bailey, chief executive designate of the Prudential Regulation Authority, admitted large banks had become too big to prosecute, raising 'very difficult questions' for regulators.Questions like: why do we need regulators if the big banks cannot be prosecuted?
The largest banks have become too big to prosecute because of the impact criminal charges would have on confidence in them, Britain’s most senior bank regulator has admitted.
In a variant of the “too big to fail” problem, Andrew Bailey, chief executive designate of the Prudential Regulation Authority, said bringing a legal action against a major financial institution raised “very difficult questions”.
Mr Bailey told The Daily Telegraph that some banks had grown too large to prosecute. “It would be a very destabilising issue. It’s another version of too important to fail,” he said,Ultra transparency both eliminates this risk of financial contagion and restores confidence in the financial system.
“Because of the confidence issue with banks, a major criminal indictment, which we haven’t seen and I’m not saying we are going to see… this is not an ordinary criminal indictment,” he said.
It eliminates the risk of financial contagion because market participants adjust their exposure to each bank based on the bank's risk and the participant's capacity to absorb losses given this risk.
It restores confidence because market participants trust their own analysis.
His comments come days after HSBC’s record $1.9bn (£1.2bn) settlement with the US authorities over money-laundering linked to drug-trafficking.
US assistant attorney general Lanny Breuer said of the decision not to prosecute: “In this day and age we have to evaluate that innocent people will face very big consequences if you make a decision.”The decision not to prosecute also has very big consequences for innocent people .... the taxpayers and the customers of the bank.
Swiss bank UBS is also reported to be close to paying $1bn to settle British and US investigations into claims it attempted to rig key interbank lending rates.Actually, like Barclays, UBS was involved in rigging Libor.
A recent spate of settlements have raised concerns banks are effectively buying immunity from past misdeeds.
“If you get caught with your hand in the till you go to jail, but if you’re a big bank and you’re caught breaking the law it seems that all that happens is you’re fined and told you’ll go to jail if you do it again,” said Rosie Sharpe, at campaign group Global Witness....It is not at all clear that even if banks are repeat offenders they will not just be fined again. This was not the first time that HSBC had issues with money laundering.
Royal Bank of Scotland is expected to reach a settlement over Libor allegations within the next couple of months.
On Thursday, George Osborne dismissed the idea of breaking up RBS, saying he was “not sure the gains outweigh the disruption”.Ultra transparency has many benefits. One of these benefits is that it doesn't cause disruption in anything other than bad bank behavior.