SIGTARP Report Says More Reform Needed by Treasury, Federal Financial Regulators
“While there have been significant reforms to our financial system over the past four years, more change is needed to address the root causes of the financial crisis and the resulting bailout, including vulnerabilities to highly interconnected institutions, and past failures in risk management.”
These words, written in a report released to Congress Wednesday by the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), warn that the U.S. financial system is still threatened by large interconnected institutions.
Leading up to the financial crisis, regulators learned that the U.S. financial system had a foundation that was built on businesses that were “too big to fail” (TBTF) and highly interconnected. “And today, the financial system continues to be dangerously interconnected,” wrote the watchdog agency for the 2008 bank bailout.
According to the report, the same financial institutions that were deemed TBTF during the financial crisis not only remain TBTF, but are now even bigger. Federal Reserve data show that before the financial crisis, the top five U.S. banking institutions held $6.1 trillion in assets, equal to 43 percent of gross domestic product. As of Sept. 30, 2012, these same institutions, which are all TARP recipients and have all since paid back the funds, held $8.7 trillion in assets. This is about 55 percent of the nation’s gross domestic product.
In order to reverse this trend, SIGTARP recommends the Treasury and federal regulators provide incentives for large interconnected financial institutions to minimize both their complexity and their interconnectedness.
“Treasury and regulators should send clear signals to the financial industry about levels of complexity and interconnectedness that will not be accepted,” SIGTARP wrote. “Treasury and regulators must set the standards through increased capital and liquidity requirements to absorb losses, as well as tighter margin standards. Treasury and regulators should limit risk through constraints on leverage. And companies, in turn, must do their part.”
The report states that it is too early to tell whether full implementation of the Dodd-Frank Act will be successful in ending TBTF, but adds it will ultimately depend on the actions taken by regulators and Treasury.More information on the SIGTARP report is available here.