Home' acuity : Acuity Sept 14 Contents regardless of whether such a bank is
systemically important or not.
This is achieved by shifting the
important and viable assets into a
"good bank" while the impaired assets
would be held in a "bad bank" with
the expectation that creditors and
unsecured subsidiary debt holders
would be "bailed in" -- that is, have
their debt converted to equity -- in an
attempt to stabilise the operation.
(Later that year, the Franco-Belgian
"too big to fail" bank Dexia was put
through the process, in what became
the first test of the new co-operative
approach to dealing with a distressed
bank -- see blue box on page 20.)
These moves led Reuters to report in
April that the risk that creditors, rather
than taxpayers, will bear the brunt of
rescuing a bank in trouble has been
recognised in the first credit ratings
given to 18 of Europe's biggest banks by
new ratings agency Scope.
The company, set up in Berlin in
2002, started credit ratings two years
ago and aims to offer a new approach
for corporate bond investors that
typically rely on the three major ratings
firms -- Moody's, S&P and Fitch.
"Banks are still too big to fail; the
only difference is that somebody else
will pay to avoid a failure, and that
somebody else is the creditors," Sam
Theodore, Scope's managing director
for financial institutions, told Reuters.
He said this "privatisation of bank
rescues" reflects an attempt by
regulators to ensure banks are not
guaranteed state support in a crisis.
According to the International Monetary
Fund's Global Financial Stability Report,
however, banks still benefit from implicit
state support, especially in Europe.
Scope, in line with most other
commentators -- from the banks
themselves and their lobby groups, to
rival ratings agencies to the US Federal
Reserve -- said all the banks it rated
were in stronger credit shape than
before the crisis, with higher levels of
capital and liquidity and lower risks in
Dodd-Frank and Volcker
Another anniversary worth
mentioning is that it is four years
since the Dodd-Frank Wall Street
Reform and Consumer Protection Act
was legislated in the US.
Dodd-Frank explicitly bans the
bailout of an insolvent bank by the US
government and severely limits the
Federal Reserve's ability to provide
liquidity support to a failing bank prior
to its holding company being placed
into receivership as part of its orderly
While the major ratings agencies seem
pleased with the move, the risk of a
taxpayer-funded bank bailout is far from
Peter Schroeder, writing for the online
US political news service, The Hill, noted
that, four years on, just over half of the
398 required pieces of legislation have
been voted into existence.
The arguments levelled by both sides
made clear that the passage of time
has done little to close the partisan gulf
between the parties on whether the
law, and the reams of new regulations it
created, were the proper response to the
The too big to fail debate has continued
to play out in the halls of Congress, with
lawmakers from both parties airing
in history and we have found ourselves
unable to prosecute any elite bankers,"
said Bill Black, an economics and law
professor at the University of Missouri
and author of The Best Way to Rob a
Bank is to Own One. "That's outrageous."
The hurdle, Justice Department
officials say, is that to prove a crime,
they must prove intent. That means
if the government wanted to bring
charges against any of the CEOs of
the companies that led the nation to
financial disaster, prosecutors would
have to prove to a jury beyond a
reasonable doubt that these individuals
intended to commit fraud.
US Attorney General Eric Holder appeared
to confirm that view in 2013 when
he said he was hesitant to criminally
prosecute big banks because he was
afraid of the damage such a move could
do to the economy.
"When we are hit with indications that if
you do prosecute, if you do bring a criminal
charge, it will have a negative impact on
the national economy, perhaps even the
world economy... that is a function of the
fact that some of these institutions have
become too large," he said during a Senate
Judiciary Committee hearing in March.
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