Bank regulators gain ground against too-big-to-fail bailouts

Mon Apr 15, 2013 1:52am EDT
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By Emily Stephenson and David Henry

WASHINGTON/NEW YORK (Reuters) - For the past year, a special team of U.S. bank regulators has been on a quiet mission to end the belief on Wall Street that large banks are "too big to fail."

The team from the Federal Deposit Insurance Corp has hosted more than two dozen meetings with bond investors, analysts and other stakeholders to lay out in detail how a failing firm would be liquidated.

One of the goals of the roadshow was to warn Wall Street not to count on a repeat of the government bailouts of the 2007-2009 financial crisis, when Washington stepped in to rescue AIG and other financial institutions out of fear that a collapse would be disastrous for the world economy.

People present at these meetings say the FDIC makes a compelling case, and there are signs that the roadshow is gradually succeeding in shifting market perceptions.

Some bond investors are demanding higher yields on bank debt that they now see as riskier because of the FDIC's plan, said Brian Monteleone, a bank credit analyst at Barclays who has participated in the FDIC meetings.

Moody's Investors Service said in March that it may downgrade some bank bonds by year-end since the United States appears less likely to bail them out. The credit rating agency has assigned a negative outlook on bonds from JPMorgan Chase & Co, Bank of America Corp, Citigroup Inc, Wells Fargo & Co, Goldman Sachs Group Inc and Morgan Stanley.

The evidence of the FDIC's persuasiveness is anecdotal at this point, however as data on bank credit default swaps, used by investors to protect themselves against default, have not shown a clear shift.

However, investors and analysts say they are studying how to price the heightened risk based on the FDIC's plan, and expect to see more movement in the coming months.   Continued...

A Wall St. sign is seen in New York's financial district September 16, 2008. REUTERS/Lucas Jackson