Two senior fellows at the Bank for International Settlements (BIS) recently proposed a scheme for recapitalising too big to fail banks.
It’s quick and simple, respects the existing credit hierarchy, lets the market determine the ultimate allocation of losses and spares long-suffering taxpayers any further pain.
As well as tidying up a hitherto insoluble problem, their plan would reintroduce a far broader range of market disciplines into the future determination of financial system risks. Hallelujah.
If they really have nailed it (and I think they probably have), this is a big deal.
Still, even the best horse can’t run when hobbled and politics, private interests and the perverse power of sunk costs may do just that:
And even though not much progress has been made by big jurisdictions such as the EU and US, what has been achieved has cost so much time and labor that the authorities may not want to unravel it and start afresh. That would be a shame. TBTF hasn’t gone away, and the next banks to need resolving may not be as small as Cyprus’s. (WSJ)
Money, Credit & Financial Systems 