There’s considerable to and fro over whether the new systemic-risk bill would name names. Although the draft expressly bars doing so, it’s clear that targeted firms would be outed ASAP. Why the fuss over whether the scarlet letter S for systemic would be pinned to the cloaks of the biggest boys? Those who fear confirmation of systemic status believe it would confer invulnerability. But, the only way effectively to govern systemic firms is to do things to them markets will clearly see. Invisibility would provide far more invulnerability, almost surely worsening risk as banks grow even bigger.
As long as the resolution regime doesn’t either authorize or facilitate bail-outs, there’s no moral hazard resulting from knowing who’s under the gun. More importantly, there’s no way to point the gun and break up the behemoths without imposing conditions that will instantly be clear to any seasoned analyst. The worst possible systemic-risk regime would have no conditions attached to the biggest firms. Even if the program meant to be tough-minded and prevent bail-out, systemic-risk firms allowed to operate with impunity will always end up too big to fail.
There’s little moral hazard in creating a system that, by virtue of additional standards targeted at systemic firms, permits their ready identification. But, even if knowing who’s systemic were a problem, we fail to see why the legislation exacerbates it. There’s little doubt now about which firms pose systemic risk – just look at who’s got the funding advantages and all the other benefits markets provide to the seemingly invulnerable. All the legislation would do by pinning the letter S would be to ensure effective regulation, since there’s simply no way for supervisors to do this in the dark.