Too Big To Fail - contd.

I have commented earlier on the TBTF doctrine.

Recently, I came across a couple of other references on the TBTF situation and what to do about it. The first from the FT has the author Willem Buiter presenting a slew of solutions on what to do about banks becoming TBTF. (Interesting how this abbreviation seems to have taken on a life of its own!) Definitely worth taking a more detailed read as the author goes to a fair degree of detail on what are some of the probable solutions.

The second is a novel way of valuing the benefit that banks get from becoming TBTF. The approach (proposed by a couple of economists Elijah Brewer and Julapa Jagtiani from the Philadelphia Fed) argues that the measure of the benefit that banks expected to get could be ascertained by the acquisition premium paid by these very banks along their journey to becoming TBTF. The estimate of this premium (looking at acquisitions from 1991 to 2004) is about $14 billion. This link references the actual paper written by the economists.

Given my obsession on getting to an optimal risk management framework for financial institutions, I thought I'd share a couple of these links.