Simon Johnson makes a great point about the looming bailout of CIT, the midsized bank now basically facing a run.
If CIT is determined to be "too big to fail" in today's context, this has far reaching implications. Instead of financial entities with assets of at least $500bn creating systemic risk, we now have to worry about anyone who has not much more than $50bn. This is a profound change--and a point that seems to have escaped the Financial Services Roundtable, which is pushing hard for a CIT rescue.
When I was talking to some financial services industry lobbyists a few weeks ago for this piece, they seemed pretty unconcerned about the idea of systemic risk regulation. The feeling was that it would mostly affect the kind of megabanks that are already heavily regulated--they'd just be regulated in slightly different ways. But, as Johnson says, if we're going to start applying systemic-risk-style scrutiny to every institution with more than $50 billion in assets, that's a lot of institutions we're talking about. For one thing, it would apply to a number of hedge funds and private equity funds that aren't really regulated at all today...
Works for me, but I have a feeling these guys won't be so keen.
--Noam Scheiber