A policy analyst recently asked me if we really could resolve a large bank during a crisis. I responded by asking him if he thought we could dismantle an aircraft carrier in the middle of a hurricane. It’s not a perfect analogy, but he got my point.
Increased capital standards for large banks have the potential to push risk to non-banks, such as hedge funds and insurance companies. Experts appropriately ask, if we substantially increase (and simplify) capital standards for banks and that drives risky activities elsewhere, has financial stability really improved? This is an important question.
The US response to end TBTF, which Kashkari said he wants to release to the public by the end of the year, would be, and should be, closely watched by policymakers and regulators in the European Union, which is grappling with its own version of TBTF.