How Big Is Too Big

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Understanding how to design cell permeable ligands for intracellular targets that have difficult binding sites, such as protein-protein interactions, would open vast opportunities for drug discovery. Interestingly, libraries of cyclic peptides displayed a steep drop-off in membrane permeability at molecular weights above 1000 Da and it appears likely that this cutoff constitutes an upper size limit also for more druglike compounds. However, chemical space from 500 to 1000 Da remains virtually unexplored and represents a vast opportunity for those prepared to venture into new territories of drug discovery.

Objective: The objective of the study was to examine the birthweight at which risks of perinatal death, neonatal morbidity, and cesarean delivery begin to rise and the causes and timing (antenatal, early or late neonatal, or postneonatal) of these risks.

Study design: This was a cohort study based on 1999-2001 US-linked stillbirth, live birth, and infant death records. Singletons weighing 2500 g or larger born to white non-Hispanic mothers at 37-44 weeks of gestation were selected (n = 5,983,409).

Results: Infants with birthweights from 4000 to 4499 g were not at increased risk of mortality or morbidity vs those at 3500-3999 g, whereas those 4500-4999 g had significantly increased risks of stillbirth, neonatal mortality (especially because of birth asphyxia), birth injury, neonatal asphyxia, meconium aspiration, and cesarean delivery. Births at 5000 g or larger had even higher risks, including risk of sudden infant death syndrome.

Today I will discuss "too big to fail" and the ongoing work since the financial crisis to end it.1 More than three years into this effort, there have been sweeping reforms to the regulation of large financial organizations in the United States and around the world. Substantial proportions of the new rules are designed to end the practice of bailing out such firms with taxpayer money. The too-big-to-fail reform project is massive in scope. In my view, it holds real promise. But the project will take years to complete. Success is not assured.

In the meantime, some urge the adoption of more intrusive reforms, such as a return to Glass-Steagall-style activity limits, more stringent limits on size or systemic footprint, or a requirement that the largest institutions break up into much smaller pieces. I believe that public discussion and evaluation of these ideas is important. At a minimum, we need to thoroughly understand these alternatives in case the existing reform project falters.

It is worth noting that too big to fail is not simply about size. A big institution is "too big" when there is an expectation that government will do whatever it takes to rescue that institution from failure, thus bestowing an effective risk premium subsidy. Reforms to end too big to fail must address the causes of this expectation.

In broad terms, these reforms seek to eliminate the expectation of bailouts in two ways--by significantly reducing the likelihood of systemic firm failures, and by greatly limiting the costs to society of such failures. When failures are unusual and the costs of such a failure are modest, the expectation at the heart of too big to fail will be substantially eliminated. My focus today is principally on the second of these two aspects of reform--containing the costs and systemic risks from failures, a goal being advanced by work to create a credible resolution authority.

I hope you won't mind if I draw today on some of my own experiences over the years with too big to fail, beginning with my service at the Treasury Department during the Administration of President George H.W. Bush. I joined the Administration only a few years after the rescue of Continental Illinois, which is sometimes said to have codified the practice of too big to fail.

In my years at Treasury, we faced a wave of well over 1,000 savings and loan and bank failures. That included the failure of the Bank of New England Corp., then the third largest bank failure in U.S. history.2 It happened in January 1991, at a time of great stress in the financial system and the broader economy, and only days after 45 depository institutions in the region had been closed and 300,000 deposit accounts frozen.3 My Treasury colleagues and I joined representatives of the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board in a conference room on a Sunday morning. We came to understand that either the FDIC would protect all of the bank's depositors, without regard to deposit insurance limits, or there would likely be a run on all the money center banks the next morning--the first such run since 1933. We chose the first option, without dissent.4

In the summer of 1991, we faced the Salomon Brothers crisis. Salomon, a global investment bank, was one of the largest financial institutions in the United States, and the largest dealer in U.S. government securities. The firm came under severe market pressure after some of its traders were caught submitting phony bids in Treasury bond auctions. As recounted in harrowing detail in the book "The Snowball," Salomon came within hours of failure over a weekend in late August.5 Salomon was clearly understood to be outside the safety net, and I recall no discussion of a government rescue. But the firm's failure would almost certainly have caused massive disruption in the markets. To this day, I am grateful that we resolved that crisis with neither a bailout nor a failure.

Over 20 years later, both these events still frame the too big to fail reform agenda. Faced with the failure of a large commercial bank, we chose to extend the safety net rather than run the very real risk of a systemic depositor run. Our "near miss" with Salomon in 1991 presaged the enormous damage that would result from the failure of Lehman Brothers, another investment bank, in 2008. In fact, the dimension of the problem grew substantially over the years. Since 1991, the ratio of U.S. banking assets to annual gross domestic product in the United States has more than doubled, from 55 percent to 126 percent. Meanwhile, the percentage of those assets held by the largest three institutions has increased from 14 to 32 percent.

Bailouts may have been more tolerable in the early 1990s when they were rare and their use for a failing bank was uncertain. That is no longer the case. Recent years have seen large and numerous bailouts as a result of the financial crisis. The public, the regulatory community, and large financial institutions themselves all agree now that too big to fail must end.

As I said earlier, reforms to end too big to fail must wage the fight on two fronts. First, we need enhanced regulation to make large financial institution failures much less likely. Second, we need a credible mechanism to manage the failure of even the largest firms, without causing or amplifying a systemic crisis.

The U.S. and Global Efforts to Address Too Big to Fail Reducing the Probability of Default of Systemic Financial Firms Much has been done since the crisis to strengthen the regulation of large banking organizations. The highlights would begin with the Basel III capital and liquidity reforms, including the graduated risk-based capital surcharges for globally systemic financial firms. These reforms are in the process of implementation in the United States and elsewhere. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) imposes on the largest financial institutions enhanced prudential standards and also requires central clearing of derivatives. And banking regulators have implemented enhanced supervisory measures such as stress testing and recovery planning.

While these measures are not the primary focus of my remarks today, I believe that they collectively constitute a broad and well-structured agenda to strengthen the resilience of the financial system. The Federal Reserve and the rest of the regulatory community are working diligently to implement that agenda.

Today, risk-based capital and leverage ratios for banks of all sizes have improved materially since 2009 and are significantly above their levels in the years preceding the crisis. The banking sector overall also has substantially improved its liquidity position over the past few years. The system is undeniably stronger than before the crisis.6

Reducing the Systemwide Loss Given Default of Systemic Financial Firms It is neither possible nor desirable to regulate large financial institutions so that they literally cannot fail. But regulation can limit the systemwide impact of such a failure. Let's review what has been done since the crisis to reduce the damage to the system from the failure of one of the very largest firms.

Under Dodd-Frank, nearly all financial institution failures, including those of large, complex institutions, will continue to be addressed as they were before passage of the new law. The holding company will be resolved in bankruptcy. Operating subsidiary failures will continue to be treated either under bankruptcy or, where applicable, under specialized resolution schemes, including the Federal Deposit Insurance Act for banks and the Securities Investor Protection Act for securities firms.

Dodd-Frank eliminated the authority used by the Federal Reserve and other regulators to bail out individual institutions during the crisis, including Bear Stearns, Citicorp, Bank of America and AIG. But Congress also recognized that there may be rare instances in which the failure of a large financial firm could threaten the financial stability of the United States. To empower regulators to handle such a failure without destabilizing the financial system or exposing taxpayers to loss, Dodd-Frank created two important new regulatory tools. 2b1af7f3a8