In response to those that believe there are Banks Too Big To Fail, Ms Lagarde, Managing Director for the International Monetary Fund spoke in New York ahead of next week’s IMF Spring meeting, and blasted the financial services industry for opposing needed reform.
“In too many cases – from the United States in 2008 to Cyprus today – we have seen what happens when a banking sector chooses the quick buck over the lasting benefit, backing a business model that ultimately destabilizes the economy. We simply cannot have pre-crisis banking in a post-crisis world.
“We need reform, even in the face of intense pushback from an industry sometimes reluctant to abandon lucrative lines of business.”
“The ‘oversize banking’ model of too-big-to-fail is more dangerous than ever. We must get to the root of the problem with comprehensive and clear regulation.”
Thankfully, regulators have forced banks to markedly expand their loss-absorbing capital safeguards since the crisis, but are still pushing for ways of “resolution” that will permit behemoth lenders to fail without making the taxpayer suffer for their mistakes and endanger the financial stability of the country. Ah, now there’s a novel idea.
She stated, “So the priority must be to continue to clean up the banking system by recapitalising, restructuring, or – where necessary – shutting down banks.” One particular option for the eurozone could be “direct recapitalisation by the European Stability Mechanism”, the bail-out fund for the region’s, she commented.
Of course there is another way to “clean up the banking system” and that would be to allow the banks (and any other business with a CEO and board members that acts like Homer Simpson) to go ahead and let them fail. Instead of removing the natural consequences of making bad business decisions, somewhere along the line we thought it best to reward goofy ideas and practices, making things worse and encouraging even goofier ideas and decisions. It seems best to take the view of letting the natural cycles take their course rather than seeing them as banks too big to fail.