Cornelius Hurley: End Too Big to Fail Banks by Shifting Responsibility to Shareholders

From Money News
By Michael Kling
January 24, 2013

Everyone agrees humungous banks that are too big to fail (TBTF) are a humungous problem, but breaking them up is the big question.

Politicians, academics and even banking industry players have criticized the mega-banks for endangering the financial system, benefiting from unfair competition and accepting government bailouts.

Cornelius Hurley, director of the Boston University Center for Finance, Law & Policy, says he has a plan to end the TBTF problem without heavy-handed government regulation.

Instead the proposal, called the Subsidy Reserve Plan, would rely on market discipline, Hurley writes in an article for the American Banker.

Under the proposal Hurley devised with former FDIC Chairman William Isaac, each TBTF bank would set aside a “subsidy reserve” line item on its balance sheet. The fund would increase yearly based on the estimated taxpayer subsidy the bank gets in the form of reduced funding costs, says Hurley, a former assistant general counsel at the Federal Reserve…

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