Are Banks Just ‘Planning Their Own Demise’?
With institution of Dodd-Frank and living will for banks, are they really just planning for the end already? On one side the argument is that it is a good idea to have a sense of planning involved in case something once deemed “to big to fail” in fact do fail. “I think a lot of progress can be made in having these firms make themselves more resolvable before you get to that point of actually imposing those severe remedies,” said John Simonson, the Federal Deposit Insurance Corp’s deputy director of Systemic Resolution Planning and Implementation in the Office of Complex Financial Institutions. The goal of the reform is to ensure that the banks are properly capitalized to handle huge losses if they were to incur them. That being said, the capital itself must be solid, meaning it cannot be made up of debt and derivatives. “Capital is like oxygen for banks. However, when your body is filled (with) cancer, as the case with European debt or stupid derivatives trades, it doesn’t matter,” Matt McCormick, portfolio manager at Bahl & Gaynor, told CNBC’s “Squawk on the Street.” The FDIC already has a prescription for the breaking up of large banks, by mandating that equity holders would be wiped out and that the holders of the debt would have their investments converted to equity at a lower value. According to Dick Bove, Rochdale Securities analyst, “It is now time for analysts to look at these living wills and see what correlations exist among bank living wills – i.e., what businesses the banks as a group have demarcated as marginal. Then it is the job of the analysts to start pounding on banks to rid themselves of these businesses,” Bove said. “Great job Congress, the American people really benefit by this one.” It appears as if these provisions such as the living will are going to increase the difficulty for the banks to survive which is opposite to the purpose of ensuring that catastrophe doesn’t strike.