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February 24, 2014

Make Banks Safer: Tax Them

“Nearly six years after the financial crisis, regulators have adopted a slew of new rules that might make individual banks a little safer. None of the measures, though, adequately addresses a more troubling and hard-to-recognize problem: the risk lurking in the linkages between financial institutions.

“New capital and liquidity rules will make banks marginally more resilient to losses and somewhat less susceptible to runs. Measures such as the Volcker Rule in the U.S. and ring fencing in the U.K. will limit big banks’ ability to make speculative bets with taxpayer-insured funds. Taken together, the new rules might also encourage the largest banks to become a bit smaller.

“The systemic risk posed by a financial company, however, depends on more than its own health and size. The detailed pattern of financial linkages between companies can determine how vulnerable they and the whole system are to shocks. The complex web of the financial network, for example, allowed the 2008 bankruptcy of Lehman Brothers Holdings Inc. to trigger the near-demise of giant insurer American International Group Inc. and a money-market freeze that cut off credit to companies around the world.”

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Read full Bloomberg article here

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