June 4, 2012


Too Big for Comfort : Why we need to break up the banks. (James Pethokoukis, June 4, 2012, Weekly Standard)

[A]merica doesn't need 20 banks with combined assets equal to nearly 90 percent of the U.S. economy, or five mega-banks​--​JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs​--​with combined assets equal to almost 60 percent of national output, three times what they were in the 1990s. That amount of complexity and financial concentration​--​which has grown worse since the passage of Dodd-Frank​--​is a current and continuing threat to the health of the U.S. economy. [...]

So how do you (a) make the financial system more shockproof when the next economic earthquake hits, (b) reduce the likelihood of expensive taxpayer bailouts, and (c) ensure the banks themselves don't cause the next crisis? Hoenig, for one, would only allow banks to engage in traditional activities that are well understood and are based on long-term customer relationships so borrowers and lenders are on the same page: commercial banking, underwriting securities, and asset management services. Banks would be barred from broker-dealer activities, making markets in derivatives or securities, trading securities or derivatives for their own accounts or for customers, and sponsoring hedge funds or private equity funds. The result would be banks that are smaller, simpler, safer. Not only would they be less likely to spark financial crisis because management would know government might let them fail, the cost of failure to taxpayers would be less.

Of course, some will argue that we need large, complex financial institutions and that their very existence is proof of that. Who are the know-it-all breaker-uppers to say we don't? But that size and complexity is itself more a result of crony capitalism than of market forces. It's little wonder, then, that the preponderance of the evidence is that all the supposed benefits from supersized banks and their economies of scale are outweighed by the risks of disaster they generate. Take this 2011 study from the University of Minnesota: "Our calculations indicate that the cost to the economy as a whole due to increased systemic risk is of an order of magnitude larger than the potential benefits due to any economies of scale when banks are allowed to be large. .  .  . This suggests that the link between TBTF banks and financial crises needs to be broken. One way to achieve that is to break the largest banks into much smaller pieces."

Posted by at June 4, 2012 6:48 AM

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