Because the FDIC does not provide insurance for the liabilities of a non-bank financial company, the super powers contained in the bank insolvency statute are inappropriate when applied to non-bank financial companies, regardless of whether a systemic risk determination has been made.
Timothy Ryan of Sifma argues that creditors to “too big to fail” firms should be granted the protections of the Bankruptcy Act in the law that acknowledges that these creditors will never be subject to the discipline imposed by the Bankruptcy Act. The basis for this view is apparently that there is no government guarantee for “too big to fail” firms. Hmm.
part of being a bank is trying to hedge as much of your [credit] risk as possible
Dan Indiviglio is just stating a fundamental principle of 21st century “too big to fail” banking. For centuries banks were viewed as playing an important role in the process of credit allocation precisely because the asset side of a bank’s balance sheet was full of loans that only the bank had the information to value correctly — that is, a bank’s job was to evaluate and carry credit risk for the rest of the economy. So just what is it that modern “too big to fail” banks are supposed to be contributing to the economy nowadays?