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I've recently read a nytimes article, which claims that minor details surrounding international regulation of swaps are major roadblocks to plans for safe wind-down of failing global, systemically significant financial institutions.

I have trouble understanding why this minor detail is such a formidable roadblock. Is it really that important that this kind of problem be resolved ahead of a major institution going bust? Won't such a major, cataclysmic, event, require special handling anyways, in which case such small holes will likely be plugged temporarily?

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Have you ever considered how much faith and confidence play a role in the financial sector? The calling in of swaps could cause issues similar to a Bank Run, which may or may not involve others coming into play. While this is cleaning up the mess from a few years ago, there is something to be said for how complicated are various financial instruments in this situation.

If you want something similar to ponder, what would make any institution be considered major and would this be agreed by various countries given how connected things are within the world? What makes an institution major in the United States may not be quite the same standards in Brazil and this where one has to consider how to maintain faith in the system that could unravel rather badly if everyone tries to cash out at the same time. The Bank Run link above is something to consider that could cause a bank that appears fine to suddenly have speculators cause more disruptions which isn't likely to help. The global credit markets aren't likely to freeze overnight and thus there can be the question how does this get handled if another mess could arise.


The idea here is to set up the framework to prevent the panic that could lead to a global depression. The idea is to create for derivatives something similar to the stock market's trading curbs that exist to contain panic on a macro level. The psychology is quite important in figuring out how to handle the obligations of a company that was perceived to be infallible as well as making sure what is agreed works across various cultures and currencies.

  • Oh. So this isn't about effective management of an institution's failure - it's more about managing human psychology, with an aim towards making the system's behaviour more reliably predictable? – blueberryfields Nov 19 '13 at 3:59

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