More regulatory oversight required for massive companies: Conference Board of Canada

Governments should limit the systemic risks posed by organizations deemed “too big to fail” through increased regulatory oversight, argues the Conference Board of Canada (CBC).
Lessons from the Recession and Financial Crisis: “Too Big to Fail” Means Too Big is part of the CBC’s ongoing series on lessons from the recession and financial crisis.
Organizations considered too big to fail are those whose failure would cause severe damage to the financial system, a particular market or a country’s entire economy.
“If the failure of large institutions can be catastrophic for a country, then the state has a responsibility to take out an insurance policy against failure, through increased regulatory oversight,” the CBC suggested.
Some steps for creating such an “insurance policy” include:
•    Creating “living wills” for organizations. Establishing a contingency plan to deal with a company’s failure would allow some consistency in policy. It would also allow stakeholders to understand what they would lose in the event of a failure.
•    Designing industry-specific risk control measures. Similar to capital requirements for banks or covenants on debt, these would prevent the failure of an organization under foreseeable circumstances; and
•    Defining the parameters of what poses a systemic risk to the country. Measures such as a company’s direct and indirect share of national employment, its market share and the size of its contribution to the country’s fiscal purse should be considered.
“Organizations considered ‘too big to fail’ are essentially free to take risks and reap any rewards, while passing on the risk of the business-ending activities to tax payers,” the CBC said. “This mismatch between risk and reward can lead to organizations taking unnecessary risks or having inadequate risk management practices.”