What does "systemically important" mean? How tin an institution, per se, move "systemically important?" The WSJ coverage of Judge Rosemary Collyer’s determination rescinding MetLife’s designation every bit a "systemically of import fiscal institution:" gives an interesting clue to how our regulators' thinking is evolving on this issue:
"Actively handle residue sheets" is a fancy give-and-take for "sell assets." So at that topographic point y'all own got it. "Systemically important" immediately only way that an establishment mightiness sell assets, because selling assets mightiness lower property prices. "Contagion" too "systemically important" are no longer close runs; y'all come across ane banking concern inwards problem too instruct own got your coin out of a dissimilar one. "Contagion" too "systemically important" is no longer the (false, but plausible) domino theory, that if I default too owe y'all money, y'all default.
Policy is no longer only close stopping runs. Policy is non only close stopping whatever large banking concern from failing, or always only losing money. Policy is close stopping property prices from falling, too stopping fifty-fifty the little marginal additional autumn inwards prices that mightiness accompany ane large institution's sales. (Except that leverage too upper-case alphabetic lineament ratios immediately forcefulness institutions to sell fifty-fifty if they don't desire to, a delicious example of contradictory regulatory commands.)
Owen Lamont's classic characterizatiion of policy-maker's mental attitude toward selling short, immediately applies to selling at all.
The [Financial Stability Oversight] council argued — bromide warning — that “contagion tin termination when relatively pocket-size direct, private losses crusade fiscal institutions amongst widely dispersed exposures to actively handle their residue sheets inwards a way that destabilizes markets.”It's non a bromide. It is a revealing capsule of how the FSOC headed past times Treasury thinks close this issue.
"Actively handle residue sheets" is a fancy give-and-take for "sell assets." So at that topographic point y'all own got it. "Systemically important" immediately only way that an establishment mightiness sell assets, because selling assets mightiness lower property prices. "Contagion" too "systemically important" are no longer close runs; y'all come across ane banking concern inwards problem too instruct own got your coin out of a dissimilar one. "Contagion" too "systemically important" is no longer the (false, but plausible) domino theory, that if I default too owe y'all money, y'all default.
Policy is no longer only close stopping runs. Policy is non only close stopping whatever large banking concern from failing, or always only losing money. Policy is close stopping property prices from falling, too stopping fifty-fifty the little marginal additional autumn inwards prices that mightiness accompany ane large institution's sales. (Except that leverage too upper-case alphabetic lineament ratios immediately forcefulness institutions to sell fifty-fifty if they don't desire to, a delicious example of contradictory regulatory commands.)
Owen Lamont's classic characterizatiion of policy-maker's mental attitude toward selling short, immediately applies to selling at all.
Policymakers too the full general world look to own got an instinctive reaction that brusque selling is morally wrong. Short selling has been characterized every bit inhuman, un-American, too against GodThe mag nails the basic problem
For 8 years, federal regulators own got failed to define exactly the “systemic risks” they claim they tin position across the fiscal landscape.But no Definition makes it slowly to endlessly expand the word's meaning.
