“It’s another way into the “too big to fail” debate, but rather than focus on breaking up the big banks, this discussion centers squarely on what, exactly, the government should guarantee.
“The thinking is simple: if policymakers made it crystal clear that the government only stands behind traditional commercial banks, then the market would discipline the companies and activities outside the safety net.
“Without the expectation of a bailout, investors and customers would require higher capital and that in turn would constrain the growth and risk-taking of companies or lines of business that operate outside the safety net. The scope of regulation could shrink because we’d only have to police what we backstop, and moral hazard would finally start to recede.
“That all sounds great, but can policymakers take us from here to there? Can they really put the TBTF genie back in the bottle?”
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