By Lauren Tara LaCapra
Sept 24 The problem of some banks being "too big
to fail" remains because global regulators have not come up with
a coordinated way to wind them down without causing market-wide
disruptions, a senior Morgan Stanley executive said on
Colm Kelleher, head of Morgan Stanley's institutional
securities business, said that while the system is safer now
than it was at the peak of the financial crisis in 2008,
competing regulatory agendas in Europe, the UK and the United
States have hampered progress. Because global banks are large
and interconnected - through short-term loans and derivatives
contracts, for instance - one bank getting into trouble could
still have wide-ranging effects, he said.
"The biggest issue has not been resolved, which is 'too big
to fail,'" Kelleher said at a Bloomberg Markets conference. "And
too big to fail cannot be resolved until you have an effective
resolution mechanism. And you cannot have an effective
resolution mechanism when you have different regulatory
The term "too big to fail" refers to banks and financial
firms that are considered so large or entwined in the markets
that their individual failures might cause a systemic crisis. It
is often linked to the 2008 bank bailout program that put $700
billion worth of U.S. taxpayer money at risk to rescue faltering
financial firms including Morgan Stanley.
Kelleher, who was speaking on a panel about whether the
financial system is safer five years after Lehman Brothers'
bankruptcy, said regulators "haven't addressed the root issues"
that would prevent another crisis. In particular, regulators
around the globe should have the ability to dismantle a bank the
way the Federal Deposit Insurance Corporation handles bank
failures in the United States, he said.
In addition to the FDIC's resolution authority, big U.S.
banks are now required to construct "living wills" that detail
how they would be liquidated if they were to fail. But that rule
is not implemented globally, and Kelleher told reporters that
living wills would not prevent a crisis because they do not
address the domino effect that would occur in financial markets
if a large bank were to fail.