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The Risk In Big Banking

March 18, 2010

from Baseline:

Countries – like the US – with large banks that are prone to reckless risk taking should limit the size of those banks relative to the economy and force them to hold a lot more capital.  If you thought the “too big to fail” issues of 2008-09 were bad in the US, wait until our biggest banks become even bigger – today the big six banks in the US have assets over 60 percent of GDP; there is no reason why they won’t increase towards Irish scale.
When Irish-type banks fail, you have a dramatic and unpleasant choice.  Either takeover the banks’ debts – and create a very real burden on taxpayers and a drag on growth.  Or restructure these debts – forcing creditors to take a hit.  If the banks are bigger, more powerful politically, and better connected in the corridors of power, you will find the creditors’ potential losses more fully shifted onto the shoulders of taxpayers.

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