Saturday, June 30, 2012

Global Finance at Risk

The biggest US banks J.P. Morgan, Citigroup, Goldman Sachs Group, Morgan Stanley and Bank of America are preparing plans for quick liquidation in an emergency without hurting the nation’s economy.

­The financial majors have to provide the Federal Deposit Insurance Corp and the Federal Reserve with their roadmaps by the July 1. Also some European financial institutions such as Deutsche Bank, Barclays, Credit Suisse and UBS are preparing emergency plans by this deadline. Eventually about 124 banks are expected to submit plans to the FDIC by the end of 2013.

These plans, known as living wills, are prepared under provisions of the Dodd-Frank financial reform law designed to end the practice of bailing out the major banks by the government.

Under the Dodd-Frank Act banks should consider liquidation through in two different approaches. The first one is through bankruptcy courts with banks negotiating with their creditors. While the second requires the FDIC to take control to provide harmless liquidation.

The liquidation plans follow J.P.Morgan's announcement last month that a trading debacle has cost it more than $2 billion, which aggravated concerns over the financial crisis. Last month J.P.Morgan CEO Jamie Dimon told the US Congress that the bank's wind down scenario would let it fail without a cost to taxpayers.

Meanwhile the banks and the regulators have been discussing what the plans are expected to include. The rules for creating the living wills are 74 pages long, including an explanations and comments. Experts say plans could be up to 4,000 pages long, providing details such as drafts of press releases and plans on acting in foreign jurisdictions in case of bankruptcy.

Global Finance at Risk: The Case for International Regulation
John Eatwell and Lance Taylor

Reviewed by By Richard N. Cooper

July/August 2000

A tightly argued, informative review of recent financial developments that also offers a conceptual framework for drawing lessons from them. The relentless logic of financial globalization, according to the authors, will lead to the internationalization of financial regulation and the creation of a global lender of last resort. Financial markets are intrinsically fragile, since the key actors base their decisions on guesses about how other investors will behave. As a result, the globalization of financial markets has produced in many countries a cautious monetary policy that introduces deflation, depresses economic growth, and imposes unnecessary costs when crises occur. The U.S. economy stands out as an apparent exception -- but remains vulnerable (in the authors' view) due to its large current-account deficit and an assumed unwillingness of foreigners to buy U.S. securities based on consumer debt. Useful progress has been made in building an international framework for official cooperation, but any recent improvements are likely to be overwhelmed by the next crisis. The authors therefore propose a World Financial Authority, based on recent developments in the Bank for International Settlements, through which central banks could pool information and reach consensus. This and other suggestions make this concise book forward-looking and controversial.

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