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January 28, 2014

Study Puts Price Tag on ‘Too Big to Fail’

“LONDON – An analysis commissioned by the Green Party in the European Parliament estimates that the cost of the implicit guarantee that governments will back large financial institutions, known as “too big to fail,” was about 234 billion euros in 2012.

“To remedy the distortions of this subsidy, policy makers should go further in carving out the risky parts of banks, demand that the banks hold even heftier capital cushions and tax any remaining advantage, said Philippe Lamberts, a Green Party member of the European Parliament who commissioned the study.

“It is urgent to eliminate the market advantage given to these institutions,” said Mr. Lamberts, who added that he commissioned the study to provide evidence for coming banking reform legislation.

“Alexander Kloeck, the author of the study and an independent consultant, said the problem with the implicit guarantee was that it created distortions in financial markets. “It’s a free guarantee the institutions benefit from,” he said on a conference call with reporters. It creates moral hazard, or the willingness of banks to take outsize risk, knowing there is a lender of last resort, he said.

“The €234 billion figure was reached by looking at eight academic and institutional studies focused on implicit subsidies. “We’ve taken everything we could find and tried to extract a meaningful average out of it,” Mr. Kloeck said.”


Read full NY Times article here

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