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Watch on the Rhine – Too big to fail

June 28, 2011

Is it just me, or does ‘TBTF’ sound all too disturbingly like the frozen yogurt chain?  I, for one, am happy to observe increasing references to ‘systemically important financial institutions’ and ‘global systemically important banks’.  If we can’t be serious about financial reform, let’s at least come up with a dignified acronym.  ‘SIFI’ has gravitas by comparison.

Yesterday, at its 25 June 2011 meeting, the honchos over at the Basel Committee on Banking Supervision agreed on measures for global systemically important banks (‘G-SIBs’). These measures, intended to reduce moral hazard, were widely expected, and included:

–   Methodology for assessing systemic importance (size, complexity, degree of global activity and  interconnectedness with other institutions and difficulty in replacing)

–   Additional required capital for these selected institutions (additional high-quality, Common Equity Tier 1 capital ranging from 1% to 2.5%, depending on the degree of systemic importance),

–   Incentives to limit and reduce systemic importance (institutions whose systemic importance continue to increase will face a further 1% surcharge, bringing the total to 3.5%).

–   Specification of an approval period and phasing-in period (January 2016 through to the end of December 2018, in parallel with the Basel III capital conservation and countercyclical buffers).

A full copy of the press release ( is located on the website of the Bank for International Settlements.

Let’s return to moral hazard, and also to frozen yogurt, which debuted on the American cultural scene while I was living in a coed dorm alongside many diet-conscious young women.  What could have been healthier than yogurt?  And it did purport to contain fewer calories than ice cream.  But just as superior climbing gear can entice mountaineers to tackle more risk, and safer autos can induce drivers to increase their speeds, back in the dorm waistlines actually increased in line with the frequency of visits to frozen yogurt shops.

Let’s hope that these new measures prove successful, and that risk and moral hazard both reduce, but let’s also not forget that economics is a behavioral, and not a physical science, and that this time might not be different.  Be careful out there!

by Kurt Muller

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