By: Michelle Patana
The discussion over how to manage banks that are "too-big-to-fail" has remained pervasive since the economy collapsed in 2007. While several industry professionals have made suggestions that range from imposing new reforms and modifying acceptable banking strategies to breaking up these institutions, an official with the Federal Reserve has noted that there is no technical way to measure whether a bank has grown too large.
The head of the Minneapolis Federal Reserve, Narayana Kocherlakota, said that before lawmakers can make determinations about these "too-big-to-fail" institutions, they must first design a metric to measure them, according to the Minneapolis Star Tribune. He noted that while the task of designing a metric may be challenging, his team has already discussed some standards that may serve as guidance.
For example, Kocherlakota suggested examining the prices of credit default swaps in on banks to make correlations between prices and the likelihood of default, the newspaper notes. He explained that if swaps aren't as vulnerable to the probability of default, banks are more likely to receive government support, and are thereby too-big-to-fail, the news source reports.
"Our preliminary work using this approach indicates that the size of the TBTF problem has fallen over the past couple of years but remains large," Kocherlakota said, according to the Star Tribune.
Several lawmakers and former bank executives have chimed into discussions about how to manage these types of institutions, which they argue hold a dangerous concentration of assets that could result in another taxpayer-funded bailout if the market crashes. While lawmakers now have the authority to call for the dissolution of the largest banks, they have yet to wield that power.