Extract

Roberto Joaquín Santillán Salgado *

The national regulatory bodies of the financial industry consist of government sponsored supervisors plus a collection of legally binding rules and principles of behavior. The violation of those regulations may result in penalties that go from simple pecuniary fines for minor violations, to the loss of franchises in the case of institutions, or penitentiary reclusion in the case of individuals guilty of major offenses. The loss of a franchise may happen in a variety of forms, which sometimes disguise the true nature of the measure. For example, government authorities not responding to bail-out calls from institutions that have gone too far astray and have fallen into financial distress, or even tacit or explicit expropriation in extreme cases.

Since the Great Depression of the 1930s, when many financial intermediaries’ franchises were lost, such extreme episodes occurred only sporadically, and were more likely to happen during severe recessions or periods of systemic stress1. However, during the recent 2007-2009 financial crisis, they became frequent again. Several implicit “temporary” franchise expropriations, including different governments’ take-over of institutions (e.g. the cases of the Royal Bank of Scotland in Great Britain2, the Bank of America and Citibank3 in the U.S., Fortis Bank in Belgium, and Hypo Real Estate in Germany), made clear that the polemic doctrine of “too-big-to-fail” was, after all, acceptable under extraordinary circumstances, and that the stability of the system had the highest priority.

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