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Too big too fail too short sighted to succeed: PCI
23 February 2010
A financial institution’s size should not be the determinant of systemic risk, the Property Casualty Insurers Association of America has urged.
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Property Casualty Insurers Association of America
david sampson
A financial institution’s size should not be the determinant of systemic risk, the Property Casualty Insurers Association of America (PCI) has urged. The US trade group warns that using such a measurement would have big negative economic consequences, cost jobs and increase systemic risk if used in financial services reform legislation.
PCI has released a new study called Problems With Reliance On Firm Size For Systemic Risk Determination from NERA Economic Consulting.
“This important new report shows that using size alone will likely lead to additional, damaging unintended consequences,” said David Sampson, president and CEO of PCI, in a statement. “We believe steps need to be taken to ensure that taxpayers are protected and to prevent another economic crisis from reoccurring. But any such changes should be designed with a clear understanding of what caused our nation’s financial crisis – and what did not.”
The US Senate is considers sweeping financial services regulatory reform measures. The House of Representatives passed its version of financial services regulatory reform in bill HR 4173 in December. Both the Senate and House bills use size alone for financial institutions as a threshold for determining who pays for proposed systemic risk assessments.
The report reaches a number of conclusions that PCI believes should give lawmakers pause before they create a systemic risk calculation based solely on a firm’s size. These include the potential for job losses and other economic inefficiencies, consumer price increases for basic financial services, and heightened systemic risk as a result of increased moral hazard.
“The moral hazard associated with the establishment of a systemic risk dissolution fund based solely on firm size could actually lead to increased risk within the economy,” said Christopher Laursen, senior consultant for NERA, in a statement. “We need to instead focus on the standards governing a firm’s leverage, liquidity and transparency.”
Sampson added: “We hope that Congress can use these findings as a tool as deliberations over systemic risk and resolution regulation continue. This is a critical time for our nation’s financial markets and insurers remain committed to seeking appropriate solutions for identifying systemic risk and protecting consumers.”