MetLife

What does "systemically important" mean? How tin an establishment , per se , hold upward "systemically important?"  The WSJ coverage of Judge Rosemary Collyer’s determination rescinding MetLife’s designation every bit a "systemically of import fiscal institution:" gives an interesting clue to how our regulators' thinking is evolving on this issue:

The [Financial Stability Oversight] council argued — bromide alarm — that “contagion tin upshot when relatively pocket-size straight , private losses elbow grease fiscal institutions alongside widely dispersed exposures to actively larn by their residuum sheets inward a way that destabilizes markets.”

It's non a bromide. It is a revealing capsule of how the FSOC headed yesteryear Treasury thinks well-nigh this issue.


"Actively larn by residuum sheets" is a fancy give-and-take for "sell assets." So in that place you lot direct keep it. "Systemically important" straight off but agency that an establishment mightiness sell assets , because selling assets mightiness lower property prices. "Contagion" in addition to "systemically important" are no longer well-nigh runs; you lot run across i banking concern inward problem in addition to become accept your coin out of a dissimilar one. "Contagion" in addition to "systemically important"  is no longer the (false , but plausible) domino theory , that if I default in addition to owe you lot coin , you lot default.

Policy is no longer but well-nigh stopping runs. Policy is non but well-nigh stopping whatever large banking concern from failing , or always but losing money. Policy is well-nigh  stopping property prices from falling , in addition to stopping fifty-fifty the little marginal additional autumn inward prices that mightiness accompany i  large institution's sales.  (Except that leverage in addition to upper-case alphabetic quality ratios straight off strength institutions to sell fifty-fifty if they don't desire to , a delicious illustration of contradictory regulatory commands.)

Owen Lamont's classic characterizatiion of policy-maker's mental attitude toward selling curt , straight off applies to selling at all.

 Policymakers in addition to the full general populace look to direct keep an instinctive reaction that curt selling is morally wrong. Short selling has been characterized every bit inhuman , un-American , in addition to against God

The mag nails the basic problem

For 8 years , federal regulators direct keep failed to define exactly the “systemic risks” they claim they tin position across the fiscal landscape.

But no Definition makes it slow to endlessly expand the word's meaning.