>Bank holding companies are subject to risk-based capital requirements which prohibit them from operating with high leverage or purchasing large amounts of risky assets.
I figured the capital requirements would indeed get stricter (I believe the article also mentions this), but I'm still skeptical as to how long the banks can rein in their greed. Capital requirements should technically force them to be more careful, but IIRC the big 5 had already managed to get their requirements increased before (from 12:1 to 40:1).
As for mergers alleviating risk, would it not also expose the system to a different risk: market consolidation? The reason given for the current bailouts is that if these handful of investment banks (or even just AIG for that matter) failed it would set off a catastrophe. If there were more consolidation wouldn't it just aggravate this risk of one failure causing a significant impact?
Like I said before, I'm not an economist, but it seems better to keep the WaMu's and Goldman Sachs' separate, in more or less mutually exclusive risk pools so that if GS fails, the deposits in WaMu don't go with it.
Anyway, good points! I'm sure if handled correctly the situation will work since it does seem to work elsewhere.
>Capital requirements should technically force them to be more careful, but IIRC the big 5 had already managed to get their requirements increased before (from 12:1 to 40:1).
Independent investment banks are not subject to the capital requirements of FDIC insured institutions. The big 5 were previously under no regulation as to their leverage ratios.
>As for mergers alleviating risk, would it not also expose the system to a different risk: market consolidation? The reason given for the current bailouts is that if these handful of investment banks (or even just AIG for that matter) failed it would set off a catastrophe.
The financial markets are highly fragmented and competitive, or at least they were 18 months ago. The risk isn't so much that one big firm will go under, but that some firms going under will set off a panic that will force lots of firms to go under. There were hundreds of independent mortgage originators, and as far as I'm aware they are now all gone.
I figured the capital requirements would indeed get stricter (I believe the article also mentions this), but I'm still skeptical as to how long the banks can rein in their greed. Capital requirements should technically force them to be more careful, but IIRC the big 5 had already managed to get their requirements increased before (from 12:1 to 40:1).
As for mergers alleviating risk, would it not also expose the system to a different risk: market consolidation? The reason given for the current bailouts is that if these handful of investment banks (or even just AIG for that matter) failed it would set off a catastrophe. If there were more consolidation wouldn't it just aggravate this risk of one failure causing a significant impact?
Like I said before, I'm not an economist, but it seems better to keep the WaMu's and Goldman Sachs' separate, in more or less mutually exclusive risk pools so that if GS fails, the deposits in WaMu don't go with it.
Anyway, good points! I'm sure if handled correctly the situation will work since it does seem to work elsewhere.