ONE EXPERT'S VIEW ON TBTF

Irwin Stelzer, the noted American economist, has put his two cents into the To Big To Fail or TBTF debate in his weekly column in a recent weekend's Sunday Times. Stelzer writes that being TBTF for many means counting on taxpayers for bank bailouts. Researchers in the domain of corporate governance sometimes call this moral hazard, which essentially means heads I win and tails you (meaning the taxpayer) loses... Kevin Dowd of the Cato Institute (2009) and Bolton, Becht and RoĆ«ll (2011), in their seminal research in the Oxford Review of Economic Policy, explore this further and latterly define  this practice as risk-shifting or gambling for resurrection.   

Stelzer reminds us this issue was last faced when some 1,000 S&Ls failed, thus requiring then a staggering $125 billion bailout by the US government.  He cites as evidence the pressure banks feel from almost zero/negative interest rates, the potential for an energy industry credit shock, and other challenges which TBTF banks face today.  However, he questions the recent experience at DB, BoA and other large TBTF banks and asks if they are well equipped to manage across the cycle for credit, market, operational and conduct risks. His comments underscore the irony that some eight years after the crisis, the TBTF issue still lurks.  Banks may have more capital than before, but the TBTF firms remain with us. 

Comments