Robo-signing, the London Whale and Libor Rate-rigging: Are the Largest Banks Too Complex for Their Own Good?
For the “Dialogue with the Fed” held Oct. 1, 2012, William Emmons, St. Louis Fed assistant vice president and economist, explored the issues and ramifications of large, systemically important financial institutions in light of recent revelations of robo-signing, Libor rate-rigging and botched hedging at large banks.
After his presentation, Emmons was joined by guest panelists Mary Karr, St. Louis Fed senior vice president and general counsel, and Steven Manzari, senior vice president of the New York Fed’s Complex Financial Institutions unit, for a panel discussion and question-and-answer session with the on-site audience. Julie Stackhouse, senior vice president of Banking Supervision and Regulation, moderated the discussion and the Q&A.
After looking at how and why some large banks became involved with the issues of robo-signing, Libor rate-rigging and botched hedging, Emmons discussed the far-reaching ramifications of these actions. He then discussed the question of how large do banks have to be to fully capture economies of scale and scope, especially in light of the systemic risk created by large and complex banks. In conclusion, Emmons examined whether the problem of “too big to fail” could be solved through 1) radical approaches that include breaking up the big banks and creating “narrow” banks, and/or 2) regulatory approaches that include legislation like the Dodd-Frank Act, international accords such as Basel III that cover capital requirements and the establishment of a “death penalty” regime for failing banks.