ncubated in the process. The second trend to emerge is increased complexity of banks. Increase of bank sizes involved not only structural growth but also geographic reach. Larger banks begin to offer a greater scope of offerings. With this plethora of change amid increased sizing, new skills needed to be developed in order to manage the new risk. The complexity and size of banks and their associated offerings caused a greater level of asymmetry between regulators and bank managers. Opponents of the safety net provided by the government have offered several alternate options, one of which is little government intervention, if at all. Such Laissez Faire approach, according to Stern, is that they do not credibly address the potential for instability in the banking system nor the TBTF problem. The absence of a federal safety net creates the potential for bank panics which would have a substantial cost to our economic system. Privatization will not eliminate the expectations in the material market making risk harder to price. Under the suggested system, the larger the institution, the more acute the problem becomes.In response to increasing TBTFs and the safety net provided by the government Stern suggested policies to address the moral hazard problem. One is developing a policy framework using market signals. This encompasses policymakers to credibly put creditors and others capable of providing market discipline at risk of loss that ultimately leads to the generations of market signals. Bank regulators are then forced to incorporate market signals into the supervisory process. This requires large banks to issue subordinated debt equal to some percentage of the bank's assets, resulting in loss of significant investments if the banks become insolvent. Subordination of debt reduces the likelihood that holders would receive coverage during a blackout. Private insurance offers another form of generating market signals, requiring...
