Capturing `hard to resolve’ November 26, 2012 at 6:56 am

An article from a little while ago about a speech by Michael Cohrs, a former Goldman Sachs banker who now sits on the Financial Policy Committee, has one good idea.

He suggested that “too big to fail” banks should be forced to pay “penalties or taxes to create insurance funds” to be used to cover the costs of a major bank collapse “and to create an economic incentive for the firms to downsize”.

The “penalty” should be “in addition to the 2.5pc capital surcharge” global regulators have recommended. In addition, he said: “We must accept that both shareholders and debt holders should suffer losses when a financial company goes into receivership.”

I like the idea that bigger banks are harder to resolve, with likely higher costs, and hence they should pay more. At first I was musing on the idea of a compulsory issuance of `write down on resolution’ instruments — something that I do think would help — but these don’t benefit from the small measure of diversification in the situation, so perhaps a government run insurance fund would be better, with premiums based on some `resolvability index’ which measures the cost and complexity of the process. In any event, thinking about how to pay for failures before they happen may be more sensible than increasingly stringent economy-destroying regulations which aim to prevent failure (and don’t succeed).

One Response to “Capturing `hard to resolve’”

  1. Could go back to the arguments for a deposit insurance scheme that’s pre funded and uses risk-based premia, with resolvability included in the algorithm? See if the EZ banking union goes for this.