Too Big To Fail: Optimizing SIFIs´ Size and Scope of Activities

This project is meant to determine the tenability of another taxpayer-funded bailout of the financial sector in the event of a crisis caused by the failure of a SIFI. We analyzed the possibility of such a scenario by answering the following three primary questions. First, can a SIFI fail given existing capital requirements, regulation of banking activities, regulatory oversight and discipline incentives? Second in the event of a SIFI failure, can it be effectively resolved on the national and international scale via existing regulatory bodies at the proper velocity using Living Wills as a roadmap? Finally, if a SIFI cannot be effectively resolved, will policymakers intervene to prevent its failure and a potential economic crisis? Our presentation to Citibank explained our methodological approach to determining whether another tax-payer funded bailout is tenable. Specifically, the primary questions were deconstructed into 36 sub questions with assigned weights and assembled into an excel-based decision-making model. After an executive summary of our results, we explained how to use the decision-making spreadsheet tool and defended our answers to each sub question within the context of an open forum debate with the audience. Our team´s conclusion is that the promise of, 'no future bailouts,' would only be tenable if the current regulatory and political climate were to evolve to allow for significantly greater international cooperation and coordination. Through our research and decision-making excel tool we concluded first, that the likelihood of a SIFI failure, while substantially reduced, remains possible; second, that in the event of a SIFI failure, sufficient fail-safe mechanisms are not yet in place to prevent contagion, which makes orderly liquidation less likely; and third, policymakers are likely to intervene even if at some cost to taxpayers to prevent a potential financial crisis.