Bank size measures aim to limit impact of bank failures (January 2010)

Rethinking Bretton Woods | Sat, Jan 30, 2010

By Aldo Caliari
In a letter appeared on the Financial Times (January 26 edition) Aldo Caliari says criticism of the recently announced White House measures to limit the size and scope of banks misses the point.

The aim is to limit the impact of bank failures

From Mr Aldo Caliari.

Sir, The logic of your article "Mission to trim giants' girth" (January 23), on the recently proposed measures to limit the size of banks, is hard to follow.

It argues that banks will be able to move businesses around so they “do not bear the full brunt of the proposed new rules”. The example supporting this assertion is that Goldman Sachs could move its proprietary trading operations to its asset management arm where it would invest clients’ money or use third-party funds. But this is exactly what the measures are trying to achieve! That bets are made with money clients gave for that purpose, not with the money of depositors (and potentially taxpayers). Same goes for Goldman’s option of shedding the deposit-taking bank business. To say that in this case companies evade the measures is like saying drivers evade transit regulation because they stop when they see a red light.

Another example offered on the measures’ alleged failure is the claim that Morgan Stanley’s proprietary trading accounts for less than 5 per cent of revenue and that this company already closed some proprietary credit trading desks in the wake of the crisis. Does this mean the company would never again grow its proprietary trading if conditions were to improve? Most likely not, thus the point for measures to prevent that in the future. Moreover, if the profits from proprietary trading are so small, then what motivates financial firms’ loud complaining?

Even more perplexing is the final quote, apparently meant as a flaw of the proposals: “You can fail as a large bank and you can fail as a small bank.” Indeed, the point of the measures is not to avoid failures but, recognising that they are bound to happen, to make them less costly to the taxpayer and less threatening to the overall system. Undoubtedly, on these two counts, failure of a small institution is better than that of a large one.

Aldo Caliari,
Rethinking Bretton Woods Project,
Center of Concern,
Washington, DC, US