U.S. taxpayers will never again bail out any financial institution, not even one deemed to be "too big" to be allowed to fail.
That's according to prepared remarks delivered by Mary John Miller, under-secretary of the U.S. Treasury at a financial conference organized by the Levy Economics Institute of Bard College in New York recently.
Instead of bailouts, Miller says, "Shareholders of failed companies will be wiped out. Creditors will absorb losses. Culpable management will not be retained and may have their compensation clawed back, and any remaining costs associated with liquidating the company must be recovered from disposition of the company's assets and, if necessary, assessments on the financial sector."
Miller then moved on to explore the related issue of whether very large financial institutions benefit from lower costs to borrow money simply because they are so very big.
The proposition is that if creditors believe a company is so big or interconnected that the government won't allow it to fail, those creditors won't demand a higher return for lending money to that company. As a result, the company might enjoy an advantage of lower borrowing costs compared with other, smaller companies that don't benefit from that perception.
Whether lenders offer the largest bank holding companies more advantageous borrowing terms based on the belief that the government will bail them out if necessary isn't clear, Miller says.
Some of the evidence that supports this argument predates the financial crisis, so it's difficult to determine whether, and if so, to what extent, this sort of advantage still exists.
"The evidence on both sides … is mixed and complicated, making it hard to attribute the existence or absence of a funding cost advantage to any single factor, including a market perception of a too-big-to-fail subsidy," Miller says.
Moreover, the catchphrase "too big to fail" itself is subject to differing definitions.
"A common use of the too-big-to-fail shorthand is the notion that the government will bail a company out if it is in danger of collapse because its failure would otherwise have too great a negative impact on the financial system or the broader economy," Miller says. "With respect to this understanding of too big to fail, let me be very clear. It is wrong."
How do you feel about the concept of "too big to fail"? Are the big banks taking advantage of their size?
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