more-arw search

Is Financial Stability a Thing of the Past?

Is financial stability something for the history books?

One of the main aims of the Dodd-Frank Wall Street Reform and Consumer Protection Act is to return stability to the financial services industry and remove some of the risks.

However, as Simon Johnson writes for The New York Times Economix blog, the Financial Stability Oversight Council established to achieve this goal has not done much.

This reflects the "predominant official view that in the post-crisis recovery phase, financial risks in the United States are generally receding," he says. That could be a dangerously placated position to take, as Johnson outlines some new risks that the council may need to address.

He points to the Capital One-ING and the Royal Bank of Canada-PNC mergers as potential creations of too-big-to-fail institutions, which could end up with systemic risks. In order to prevent another Lehman, Johnson suggests banning large banks from expanding further through mergers, and maybe even breaking up existing big institutions such as Bank of America.
Indeed, BoA's layoffs, its subsidiary Countrywide's debt and its own tumbling stocks have some calling for an intervention and breakup.

Having more, smaller banks could prevent bankruptcies from impacting the entire system, Johnson suggests. "If the Dodd-Frank legislation is to have lasting impact, the FSoc needs to establish itself as a meaningful overseer of systemic financial risks," he says.