Post-2008 financial crisis reforms didn’t solve the problem of ‘too big to fail’ banks

London
CNN
 — 

Regulation introduced after the 2008 financial crisis was supposed to make bank bailouts a thing of the past. But its biggest test so far has revealed some serious shortcomings.

In what feels like deja-vu, governments have had to step in as lenders of last resort to prevent the recent bout of turmoil in the banking sector from escalating into a full-blown crisis. By tapping public funds to shore up ailing private institutions, they have laid bare the huge risks that bank failures still pose to taxpayers and the wider financial system.

“I have argued for years that the biggest banks in the world are still too big to fail. This question is now beyond doubt,” Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, told broadcaster CBS Sunday.

Karin Keller-Sutter, Switzerland’s finance minister, hit the message home when she said that restructuring embattled Credit Suisse

(CS) in line with internationally agreed post-2008 guidelines “would probably have triggered an international financial crisis.”

“I have come to the realization in recent weeks that a globally active, systemically important bank cannot simply be wound up according to the ‘too big to fail’ plan,” Keller-Sutter told Swiss newspaper Neue Zürcher Zeitung. “Legally, this would be possible. In practice, however, the economic damage would be considerable.”

Keller-Sutter was at the center of a government-orchestrated rescue of Credit Suisse by its larger rival UBS

(UBS) earlier this month. The Swiss authorities decided that the lender, which had struggled for years, needed an emergency takeover after the sudden failure of Silicon Valley Bank in the United States rattled bank investors around the world.

But executing the deal could eat up billions of dollars of public money through loans and guarantees. That raises uncomfortable questions over whether much-vaunted regulatory reforms have really made the financial system more stable and less of a threat to the public purse.

Global standards for dealing with teetering “too big to fail” banks were key a part of the package of rules introduced after the global financial crisis. They were designed to make it possible to wind down a…