Monday, April 12, 2010

Big Banks II

This piece concerns an about-to-be-released report on the failure of Washington Mutual in September 2008. The failure looks like a classic moral hazard episode, and highlights the failure of regulators to properly control WaMu's risk-taking. Moreover, the two regulators with an interest in limiting risk at WaMu, the FDIC and the Office of Thrift Supervision (OTS) became embroiled in a disagreement over the soundness of WaMu prior to its failure, with OTS apparently in denial until it was too late. I think we could make a case that the key problem in the US banking sector is not that the banks are too big - they are just badly-regulated. See also Krugman's column here, which makes some sense for a change (though I don't think he has the story entirely right). Krugman points out problems with risk-taking at small banks in Georgia - i.e. it's not size, it's the regulators.

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