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New Bank Rules Won't Stop Bailouts 

August 10, 2016

Satyajit Das, Bloomberg

Since the 2008 financial crisis, policy makers around the world have put new rules in place to make banks less risky and more transparent. They're confident that these changes have made the financial system safer and eliminated the need for taxpayer bailouts. But as Julius Caesar said: "Men willingly believe what they wish to be true."

Start with new rules on capital. Prodded by regulators, banks have been increasing their buffers against losses with higher levels of shareholder capital and total loss-absorbing capital, or TLAC. But more capital won't reduce the incidence of losses: In any future crisis, the problem will simply be transferred to shareholders and holders of TLAC securities, such as private investors, pension funds and insurance companies. Given the systemic and political importance of those investors, a government bailout is still the likely result.

Similarly, banks are now required to hold more high-quality assets, typically government bonds, to protect against a run on deposits or a disruption to money markets. While this arrangement has helped governments finance themselves, it also introduces new problems. The credit quality of many government issuers has deteriorated, and the default risk of governments and banks are inherently linked. Read more

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