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Big banks should be allowed to fail, just like small ones. That’s what Jim Barth, Lowder Eminent Scholar in Finance at the Harbert College of Business, will tell a global gathering of bankers and regulators Friday, March 18, at the National Institute of Economic and Social Research Conference at the Bank of England in London.
“We don’t want to bail out big banks ever again,” said Barth, who will present the paper “Too Big to Fail and Too Big to Save: Dilemmas for Banking Reform,” at the conference with co-author Clas Wihlborg of Chapman University. “We have to be certain that big banks are not too big to fail. We must treat them just like smaller banks. We allow small banks to fail, but we don’t yet allow big banks to fail.”
The Dodd-Frank Act of 2010 is supposed to put an end to protecting the nation’s largest banks from financial collapse. Barth suggested that existing subsidies and regulated protection mechanisms be removed for big banks.
“The next time a big bank is in trouble, it should be allowed to fail,” Barth suggested. “We must eliminate once and for all big bank bail outs. We must change the incentives of big banks and the regulation authority to eliminate ‘Too Big to Fail’.”
Why should big banks be allowed to fail?
“Some could become even bigger and take on more risk,” Barth said, adding that further risks could cause banks to become “insolvent” knowing the government would bail them out. “So they get all of the upside gains, but the government suffers all of the downside losses. It’s like going to a casino and being told – if you win money you can keep it, if you lose money then somebody is going to cover your losses.”
Barth pondered what another financial crisis might bring.
“Are we certain that this won’t happen again?” he asked. “The financial crisis of 2007-08 had a devastating impact on the lives of many people worldwide and we don’t want another financial crisis to be even worse.”
The conference “Financial Regulation: Are we reaching an efficient outcome?” features a number of academics and experts in banking and finance. The conference will provide a critical overview of alternative measures and ask whether or not the banking industry is any closer to a financial system that is appropriately stable and efficient in fulfilling its functions to global economy.