With regard to Megabanks, under the administration’s proposal, companies such as Citi, Goldman Sachs and others in a broad top tier engaged in complex transactions would face stricter scrutiny and have to hold more assets and more cash as cushions against a downturn.
They also would have to anticipate their own demise, drafting detailed descriptions of how they could be dismantled quickly without causing damaging repercussions. Think of it as planning their own funerals — and burials.
Obama’s plan, in short, aims to make it far less appealing to be so big. That was the middle ground the administration sought, a step short of an outright ban on systemically risky companies.
“Without banning them we’re providing some pretty heavy penalties for entering” the top group of institutions that could pose a risk to the entire financial system, said Diana Farrell, deputy director of the White House’s National Economic Council.
“The regulator might say to a large institution, ‘Make sure there is very good reason to allow yourself to get that big, or that interconnected, or that complex because the penalties will wipe out any advantages, such as lower cost of capital, you might have.'”
Some companies, such as Citi and Goldman Sachs, might bite the bullet and take on the added burden; in global capital markets some firms need to be large.
Others might choose to reduce their financial footprint.
“It’s a very sophisticated and very effective way to force institutions to deconsolidate,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics, a consulting firm that advises financial institutions.
