This is very odd indeed

\”For years, our financial sector was governed by antiquated and poorly enforced rules that allowed some to game the system and take risks that endangered the entire economy,\” President Obama said.

\”The American people will never again be asked to foot the bill for Wall Street\’s mistakes. There will be no more taxpayer-funded bailouts. Period.\”

Eh?

So what\’s this bank levy all about then?

One of the things that Obama has proposed, one of the things that seems truly sensible, is that there should be a bank levy. Levied on liabilities, some small percentage of what the banks owe to other people. But the interesting bit is that it only applies to such liabilities which are not covered by other schemes, like the FDIC one on retail deposits (nor to Tier 1 capital, obviously).

The reasoning goes like this. Banking systems without  deposit insurance are subject to runs. Over recent decades the shadow banking system grew up (more specifically, much bank funding came from the wholesale markets, part of that shadow system, and wholesale funding carried no deposit insurance) and it was a run on those wholesale deposits/shadow banking system that caused the financial crisis (note, not the housing slump, the losses, or the recession: just the bit of all of it that nearly made the financial system fall over).

The solution is thus to have a deposit insurance system for the wholesale markets, that insurance being paid for by a levy on those liabilities to said wholesale markets. Which is what is proposed.

Yes, there is moral hazard here but banking really is different.

But if he\’s deliberately setting up a system where the taxpayers are insuring deposits, which he is, then how on earth can he promise no more tax-payer funded bailouts?

Does. Not. Compute.

Or is this all politics again?

3 thoughts on “This is very odd indeed”

  1. I think the idea is that the reformed regulatory system is supposed to prevent the need for future bailouts (wilful suspension of disbelief required here I think).

    The levy is not an insurance premium for future bail outs but intended as recompense for the bail outs recently undertaken.

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