Academic

Since this current financial crisis began, we have been hearing claims that some entities are simply ?too big to fail,? and hence we should be prepared to bail them out to the tune of billions of dollars because the consequences of their failure on our financial system would be too dire.  To be sure, the notion of ?too big to fail? raises a regulatory question.  That is, if certain entities are so fundamental to our financial system that they cannot be allowed to fail, do those entities warrant some enhanced or different regulation?  On Friday Paul Volcker and the Group of 30 issued a report entitled Financial Reform: A Framework for Financial Stability that makes 18 recommendations aimed at helping all countries respond to the financial crisis, but with particular emphasis on the U.S. financial system because, as the report indicates, the current crisis is ?rooted in developments in the U.S.?  Some of those recommendations are at responding to the too big to fail issue.  In particular, the report includes recommendations that would limit the size and scope of banks.  Thus, the report recommends that banks should ordinarily be prohibited from sponsoring and managing commingled private pools of capital?that is, private-equity or hedge funds.  Moreover, regulators should guard against ?excessive concentration in national banking systems? and thus consider nationwide limitations on deposits.  As the Washington Post indicates, Volcker contends that the aim of these reforms is to ?Keep them small, so that any failure won?t have systematic importance.?  In other words, Volcker and the G30?s response to the too big to fail issue is, don?t let them get too big.