Too Big to Fail?

Over the last decade, the “too big to fail” or systemically important status of banks, combined with the FDIC’s Transaction Account Guarantee (TAG) program, has allowed many of the country’s largest banks to grow even larger. Treasury professionals who may have been reassured by a bank’s brand and size also may have increased counterparty exposures and increased potential risks across many channels. This confidence appears to be an unintended consequence of government bailouts and is potentially misplaced, as an interpretive review of the directives in the Dodd-Frank bill calls for mechanisms that will specifically reduce or eliminate the presumption of government support for banks.

From a high level, the provisions of Dodd-Frank give instructions as to how to wind down a troubled bank’s capital structure while preserving insured deposits and ensuring that vital banking operations carry on. The bank’s credit holders (including bondholders), meanwhile, could be recast and unsupported. This reality highlights the need to shift the “too big to fail” assumption to an assessment of stand-alone credit risk.

With these developments in the banking sector, the first challenge is to understand the aggregate exposure across one’s organization and the next step is to formulate a credit/risk review of these exposures. To start the conversation this month, our research focuses on the evolution of credit support for banks against a backdrop of credit trends in the banking sector.

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Best Regards,

Ben Campbell
President & CEO