Bernanke Keeps Challenging ‘Too Big to Fail’ Notions

Fed Chairman Ben Bernanke has been out in his last three or four speeches now trying to address the “too big to fail” issue.  What is interesting is that he is now ringing the tune that (as possible systematic risk regulator) he doesn’t want this to be the case in the future.  Just recently he and others have been debunking any notion of nationalization where the government would seize control and operate a large institution with the aim of putting it back to the market.  So, do we dare assume that now the tune will be “We do not want to run banks, but we will close and liquidate them?”

Bernanke spoke to a group of community bankers today at the Independent Community Bankers of America’s National Convention and Techworld in Phoenix.  There was one statement from his speech which this entire notion is worth looking back into.

Bernanke’s fourth point about addressing the “Too Big to Fail” problem was, “Improved resolution procedures for these firms would help reduce the too-big-to-fail problem by giving the government the option of safely winding down a systemically important firm rather than keeping it operating.” To this, he received a big round of applause.

Keep in mind that community and regional bankers were cheering over what they wanted to hear.  They have been under attack by the large money center banks and super regional banks for years, so it is no shock that these bankers might like the idea of a huge banking institution being unwound.

Both Bernanke and Geithner have stressed notions against nationalization.  That probably hasn’t changed.  Today’s tune by Bernanke is not a brand new one, but it does bring up questions.  Last week’s massive bank rally was partly on the notion that no majors disappear.  Today’s speech and prior comments probably don’t change that.  But there are still more questions that are unknown, and there will probably continue to be more questions than answers for some time.

Lastly, we want to keep in mind that this is still unfinished business.  We do not have a full stress test yet, we do not have what the laws will be going forward, and we do not even have a consensus yet on how much anyone in the financial industry will be allowed to earn if they have accepted any help from the government.

Bernanke’s full speech is here.

Jon C. Ogg
March 20, 2009