April 2, 2014
As the first round of submissions to the Federal Government’s Financial Systems Inquiry closed this week there was a timely reminder that the fundamental cause of the global financial crisis is still deeply embedded in the banking system.
The world’s wealthiest and most powerful banks still operate behind the shield of being “too-big-to-fail” (TBTF), an issue that former US Federal Reserve chairman Ben Bernanke fingered as a major factor in the meltdown and the ensuing economic calamity that still haunts markets and economies worldwide.
Both the International Monetary Fund and the Fed have just published studies showing that, not only did the TBTF policy encourage a coterie of banks to place bigger and riskier bets, it is the taxpayer who largely underwrites the whole operation.
A team of economists in the Fed’s New York office were first out of the blocks last week with a study of more than 200 banks in 45 countries which found “an increase in government support leads to a higher ratio of impaired loans” – that is loans in default or close to default.
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