>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.
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.