Bank too big to fail? There's a plan for that
Documents show banks have been put on notice.
There's a secret reason why banks have been super-cautious for the past two years. Government regulators put banks on notice in May 2010, that they cannot expect a bailout should they face collapse. This is according to previously secret documents that were released to the media this week.
Wall Street and banks are doing well, but Main Street hasn't seen the mythical trickle down effect.
It's a wake-up call to big banks, telling them there will not be another bailout, but rather a controlled dismantling of their assets should they fail again.
"Make no assumption of extraordinary support from the public sector," the documents said.
Several large banks including Citigroup, Morgan Stanley, and JPMorgan Chase, to were told to prepare contingency plans for their own demise. Banks were ordered to be prepared to sell off assets, obtain funding from outside sources, and to reduce risk.
The secret plans are part of the Frank-Dodd Act, which are known as "resolution plans." These plans, or "living wills" as they are also known, provide a plan for banks and regulators to follow to prevent a bailout of "too big to fail" institutions.
Americans have been none too pleased with big banks, who when faced with failure took massive bailouts from taxpayers. Following a return to stability, financial institutions then went looking for new revenues - from their customers. Most of the moves proved unpopular.
Bank of America in particular, gained infamy over the past year as the bank people loved to hate because they attempted to implement a host of new fees. Customers rejected many of the new fees, seeing them as ingratitude and spite, in the face of the bailout.
Meanwhile, Bank of America defended its position, saying it needed new revenues to offset losses and to maintain stability.
Despite regulations and other safety measures, economics are cyclical. Banks must adapt to changes in the business cycle like every other institution. Those adaptations may not be popular, and sometimes they may be mishandled, but it is a certain thing that changes will come. Among those changes will be dramatic shifts in the banking sector over time. Sooner or later, there will be another meltdown, and a bank that is regarded as "too big to fail" will do just that.
The good news is, now there's a plan for that.
© 2012, Distributed by NEWS CONSORTIUM.
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Pope Benedict XVI's Prayer Intentions for January 2013
General Intention: The Faith of Christians. That in this Year of Faith Christians may deepen their knowledge of the mystery of Christ and witness joyfully to the gift of faith in him.
Missionary Intention: Middle Eastern Christians. That the Christian communities of the Middle East, often discriminated against, may receive from the Holy Spirit the strength of fidelity and perseverance.
Keywords: Banks, bailout, Frank Dodd Act, too big to fail
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