Too Big To Fail Banks Get Permission To Use “Their Own Risk Models”

From the Financial Times:

During the trial run, banks had to show they could comply with a more tailored approach to meeting capital requirements for four consecutive calendar quarters before they could officially rely on that method.

The Fed announced that eight bank holding companies, eight national banks, and four state member banks had satisfactory trials, ending a more than five-year limbo period for the largest US banks that had been waiting to hear the results.

Morgan Stanley, Bank of New York Mellon, State Street, Northern Trust Corporation and US Bancorp were also among the banks that successfully completed the trial.


Under this approach, a bank’s operational risk for capital is determined based on a bank’s internal models, which take into account internal loss data, external data and other factors. The standardised approach for smaller banks is based on a more simplified model based on their gross income and other factors.

The trial runs began after US regulators approved final Basel II rules in 2007, leading to questions as to whether there were problems with the banks because regulators had not announced clearance for those companies for several years.

Feds: OK, you guys have proved to be the biggest bunch of sociopathic thieves in world history–successfully defrauding municipalities and investors (you call them “muppets”) out of trillions upon trillions of dollars, while paying only minimal fines, with no one going to jail–but for this test, we’re going to trust you to honestly tell us whether you should remain in business, or whether we should come in and slap your wrist. OK?

Wall Street: Yes, slave, we’ll be honest. Where would you like your next campaign contributions sent? And we also have a truckload of generous perks for you.

Feds: Very well. We’re glad we can trust you. And if you run into trouble just remember: Taxpayer bailouts are only a phone call away.

What could possibly go wrong with an arrangement like this? I mean, it’s like trusting people to self-report when they speed, or run a red light… everyone would do it, right?