G-SIBs
Readers of this blog will be well aware of the role played by the International Monetary Fund (IMF) in assisting countries facing balance of payments and fiscal crises. Active since its creation in 1944, it has been particularly involved in the wake of the financial turmoil that followed the collapse of Lehman Brothers in September 2008, providing loans to near-bankrupt countries (both emerging and developed), conditioned on the implementation of economic plans that focus on reductions in public sector deficits, and on structural reform, usually with the goal of reducing labor market rigidities and enhancing tax collection methods. Most notable of these have been the programs advanced in Greece, Portugal, Ireland and Cyprus, in partnership with the European Commission and European Central Bank (the so-called "Troika"), but assistance has also been advanced recently to Pakistan, and offered to Egypt where the disbursement of funds is still waiting on a government willing to, and capable of, implementing the Fund's conditions. And just yesterday, speaking in Washington, Managing Director Christine Lagarde indicated that the Fund has $18 billion ready, and is leading a $27-billion global bailout for cash-strapped Ukraine, an example, as Ms. Lagarde noted, of "international (read "western") co-operation in action".
In addition to this role of global firefighter and lender, however, the Fund is a think-tank powerhouse, packed with economists regularly issuing scholarly papers on a range of economic issues. One of these, reported on by the Fund frequently in recent years and again just this month, has been the issue of "too-important-to-fail" (TITF) banks, alternatively referred to as "globally-systemically-important-banks" (G-SIBs). These are the institutions whose scale, complexity, and interconnectedness have made them difficult to manage and supervise, especially since the onset of the financial crisis in 2007, but too significant to world financial stability to permit their failure. Required fiscal expenditures to finance distressed SIBs have been substantial, but immediately forthcoming, leaving little doubt about governments' willingness to bail them out.
But as the IMF authors point out, such developments have, indeed, reinforced incentives for these banks to become even larger - and more complex - with the result that in many countries, the banking sector has become more concentrated. This is illustrated in the schematic below:
It is true, the authors note, that these banks have been repairing their balance sheets, and policymakers have introduced broad-ranging financial reforms (such as the Dodd-Frank Wall Street Reform and Consumer Protection Act in America). Nonetheless, the IMF concludes that "the expected probability that SIBs will be bailed out remains high in all regions". Or as Mark Carney, Governor of the Bank of England and Chairman of the BIS Financial Stability Board, said in October 2013, "the expectation that systemically important institutions can privatize gains and socialize losses encourages excessive private sector risk-taking and can be ruinous for public finances...Firms and markets are beginning to adjust to authorities' determination to end too-big-to-fail. However, the problem is not yet solved".
So, seven years into the worst financial crisis since the Great Depression of the 1930's, we are still dealing with the TITF quandary - impossible to ignore and difficult to resolve.