How to reduce risk on Wall Street? Make the banks pay
Matthew Richardson and Nouriel Roubini wrote in Washington post an excellent article on how to reduce sytematic risk on Wall Street.
They proposed 2 types of fee to be paid by banks, one for the liabilities that government is going to guarantee explicitly or implicitly and the other based on how much damage a financial institution will do to the economy in a systematic crisis.
Their analogy is as follows:
If the neighbor’s house is burning strongly, putting the fire out might risk the lives of the firefighters. You can still call the fire department, but instead of saving the neighbor’s house, the firefighters stand in protection of your house and those of your other neighbors. If the fire spreads, they are ready to put it out. This approach could save lives, and it has the added benefit of chastening your guilty neighbor into refraining from smoking in bed, or perhaps installing new fire alarms
It’s time to change the incentive and make Wall Street and creditors who buy Wall street non-govt guaranteed liabilities pay for their mistakes.
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