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How to Manage Bankers' Voracious Risk Appetites 

June 2, 2014
J.V. Rizzi, American Banker

Regulators have yet to solve too-big-to-fail. Eight domestic systemically important financial institutions — Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon and State Street — are, as a group, larger than they were before the financial crisis. They are just as dangerous to the financial system and more likely to be saved with taxpayer dollars if they falter. The problem is that regulators have attempted to change bankers' behavior while ignoring the way that bankers' risk appetites impair the effectiveness of new rules.

Bankers at the big eight institutions have an incentive to maximize the value of their implicit government guarantee in order to achieve their return-on-equity targets and bonuses. Hence, they have high risk appetites.When regulators pass new rules intended to increase the stability of the financial system, bankers find ways to offset the impact of those rules so as to return to their desired risk appetite. It is as if there is a Newton's third law of banking: for every regulation, there is an equal and opposite reaction by bankers.

Read more: American Banker

 
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