August 23, 2013
The Basel Committee on Banking Supervision’s recent recommendation to add new and more in-depth criteria to determine a global systemically important bank, or GSIB, is a sign that it is very serious about reeling in large, globally interconnected banks.
The new guidelines are badly needed and are a significant improvement of a version issued in 2011. The language in the new paper demonstrates that the Basel Committee is very concerned about the potential moral hazard costs associated with implicit guarantees for GSIBs, which, rightly or wrongly, often come from the perceived expectation of government support. This type of support can end up reducing necessary market discipline and increase bank’s risk-taking with depositors’ money. Moral hazard could even increase the probability of distress in the future and again, very adversely affect taxpayers…Read More