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Break Up the Megabanks? We Could Do a Lot Worse

There has been a great deal of chatter recently about too-big-to-fail. The presidents of two regional Federal Reserve banks – in Dallas and Kansas City – are calling for the end of government support for and the breakup of systemically dangerous financial firms. The defenders of these Wall Street giants have responded by saying that our nation's economy and international competitiveness will suffer if we break up too-big-to-fail institutions.

But consolidation in the banking industry and the emergence of financial institutions with explicit government guarantees against failure haven't exactly contributed to an economic boom. It's been just the reverse—they triggered an economic collapse.

Downsizing too-big-to-fail institutions and the risks they pose to the financial system could not be worse than taxpayers spending trillions of dollars propping up these firms and federal officials, not the free market, picking winners and losers. Taxpayers should never underwrite the mismanagement or overreach of any firm. If it comes to that, the firm and all stakeholders should be wiped out—just like too-small-to-save banks are on Friday nights.

We've been down this road before.

Teddy Roosevelt understood the implications of too-big-to-fail and systemic risk in his day. In the early part of the last century, Roosevelt and Attorney General Philander Chase Knox sought to break up the "trusts," which were choking the economy, stifling innovation and competition, and hurting consumers and taxpayers. Following the breakup of industrial monopolies, the economy and job market flourished. Three decades ago, the breakup of AT&T led to a renaissance of innovation, competition and job creation in the communication sector.

The United States became the greatest nation on earth not because we had the biggest banks but because we had the most robust free markets. The Japanese learned the folly of "bigger is better" the hard way—and so did we three years ago. Oligopolies and asset concentration strangle competition and stifle innovation, job creation and free markets.

Our 10 largest banks may employ 1.1 million people today, but how many will they lay off as they struggle to maintain efficiencies in the future?

And consider how many more could be employed by the dozens of spinoffs dismantling these behemoths would create—not to mention the enhanced competition and benefits to consumers.

So I applaud those who are speaking out and working to restore balance and truly free markets to our nation's economy. They are tired, and so am I, of watching the government, instead of the free market, pick winners and losers—keeping taxpayers on the hook for a handful of firms that put us all at risk.

Camden R. Fine is the president and CEO of the Independent Community Bankers of America.


(8) Comments



Comments (8)
The Brown-Kaufman Amendment to Dodd-Frank was considered and summarily rejected by YOUR Senators. It lost 61-33 and it wasn't anywhere close to the sort of wind-down of the TBTF banks that should take place. The comment above that suggests that TBTF isn't a significant part of the problems is, well, comical. In any oligopolistic system - made worse by the corruption allowed through the manner in which BIG government and BIG finance combine in their financing of each others' fleecing of the sleep-walking "proletarian" - the welfare loss (that you learn about in Econ 101) accrues to the benefit of the real owner/insiders: the executives and certain other classes of owner/insiders. Sadly, as Matt Taibbi points out in his interesting book "Griftopia", most Americans don't understanding banking and finance and how symbiosis between banking, politics, and global trade. The wealth of nations is build on innovation, free and equitable trade, and comparative advantage. TBTF should be ended by the immediate, prioritized execution of Title II of the Dodd-Frank Act - The Orderly Liquidation Authority (OLA). This won't happen without a crisis, and some serious education of the "people". Just watch - when the first round of Living Wills are submitted to the FDIC and FRB on July 1st of this year, they will be nothing that can be used by the authorities, and the authorities may be forced by the "cartel" to give them more time. Instead, I would encourage capital, liquidity, and surcharges be ramped up IMMEDIATELY and stay in place until reasonable, repeatable, and orderly plans are received. I would then encourage the authorities to proceed to dismantle the TBTF firms based on "risk" that can be more thoughtfully assessed and made transparent through better stress-testing, cross-border interconnectivity/contagion factors, and additional criteria that has not yet been discussed. We have the tools. Sadly, just last week the GOP (House side) sought to repeal Title II. What does this tell you about the entrenchment of TBTF power in DC? Enough. It tells you enough. The question is: how do the wiser minds get together (through forums like the American Banker) to educate, correct, and act on a more reasonable approach, such as breaking them up? Easy to write an article like this. But it is just words on paper. What is the action plan?
Posted by Stentor | Wednesday, April 25 2012 at 12:29AM ET
All excellent points. Unfortunately I belive that TBTG is in our rear view mirror and FIs have now reached the size of TBTS (Too Big To Save). Unless these gigantic institutions are sytematically dismantled, concentrations of risks spread out, even governments will not have enough resources or tax payer horsepower to save the largest ones. Considering the US is closing in on its own insolvency, how could the government possibly finance another bail out even if our leaders are predisposted to do so?? If concentrations of credit are a principals worthy of requiring bankers to incorporate into portfolio management practices, why would the same not hold true for concentrations within our financial system?
Posted by SEG NSFP | Wednesday, April 18 2012 at 4:24PM ET
As a life-long community banker who recently joined the trade association world, I quickly discovered how some knowingly misstate or twist the facts to defend the existence of too-big-to-fail banks. The sad reality is that it appears some are so desperate to hide their own lack of strategy and effectiveness that they are willing to stoop to just about anything to deflect attention away from their conflicted positions on key issues. Is repeating a lie over and over again to make it sound like the truth a strategy? Perhaps, but as a community banker, I am simply appalled. What happened to integrity and, more importantly, why all the blame and sour grapes?

While I found most of the responses to this particular BankThink piece to be passionate, intelligent, and thoughtful, the response from "AberW" is disingenuous at best. ICBA never supported the passage of the Dodd-Frank Wall Street and Consumer Protection Act. The facts are these: ICBA strongly opposed all sections of Dodd-Frank that would have had a negative impact on community banks, such as the Durbin interchange amendment and other ill-founded proposals that never made it into the bill. ICBA supported discreet sections of the bill that helped bring the nation's 7,000 community banks parity with TBTF banks, such as changing the FDIC insurance assessment base so that TBTF banks paid their proportional share of premiums. This resulted in a shift of $1.5 billion of disproportional premium expenses each year from community banks to the TBTF banks. And ICBA supported sections of the act that would end TBTF. ICBA made these positive changes a reality for community banks across the nation. ICBA has a membership of only community banks, no TBTF or shadow banking organizations, so creating a "seat at the table" strategy was effective; that said, at no time did ICBA ever endorse or support final passage of the bill. At ICBA there was no need for double talk, no need to protect a revenue stream from TBTF institutions while placating the rest of the membership. ICBA was focused on its only mission, community banks.
Posted by tjorde | Wednesday, April 18 2012 at 10:49AM ET
It's time the control of banks shifted back towards the entrepreneurs and risk takers, who have shown in insurance circles that individuals having incentives to take risk that add to job potential stimulates minds and gives people hope. The IT systems are more than adequate to spread concentrations of power to smaller syndicates of more local control and hope that must be felt more broadly for economic growth to accellerate. It's the smaller entities that will help spur growth for the samll businesses that are vital to their growth. This issue should be a rallying call for all community banks and should be made into as much of an election issue as possible....
Posted by Dukes Capital | Tuesday, April 17 2012 at 1:04PM ET
Bank size is like goldilocks porridge: not too big, not too small, but just right. Regulators and politicians have encouraged too big to fail to justify implicit or explicit bail-outs to avoid large and potentially embarrassing failures. Competition is always in the public interest.
Posted by kvillani | Tuesday, April 17 2012 at 10:40AM ET
The premise of free market capitalism as a system that drives efficiencies in the marketplace and opportunity for upward mobility of citizenry is undermined by the reality of anti-competitive forces in a highly concentrated industry. This foundation concept underlies the [diminshing] tolerance that the US citizenry have for the bailiouts and widely-perceived "predatory" antics of the TBTF banks.

the average american is little impressed by the alarmist rationale used to defend "bigger is better" in order to compete on a global lending stage. The profitability of TBTF's on the global markets is of no concern to US citizens. Today the widely-held view is that these banks have taken on utility-like government support. It takes no great genious to borrow money from central banks at near zero interest rates and lend it to consumers --or Spanish provinces at 7%.. That has the earmarks of utility-like guaranteed income streams. The sense is worsened when the added layer of government support is tacked on--a check valve that provides a shield from failure if the rogue bad bets lose. Thus today the average man on the street sees the situation of TBTF banks as a guaranteed income stream--justified for utilities by heavy regulation of monopolistic service providers--but without the ceilings borne by utility profits.

we have reached the intolerable situation wherein bankers expect a guaranteed income stream---protection for common equity holders against bankruptcy loss no matter how incompetent the betting parlor operayors become--but with limited regulation afforded enterprises that are otherwise regulated by a marketplace that punishes excessive risk-taking by commensurate high cost of capital.

The TBTF banks have achieved a status of exemption from all norms of business concepts. Monopoly-earnings protection without the brakes of heavy regulation and capped earnings--ie a rational cost of capital environment. Stated simply its as if these were high rollers going to Vegas with the confidence that the wheel will never hit losing slot. This encourages excessive risk -taking----in fact the greed factor drives the taking of risk in this heads i win-tails you lose "business" environment. The blatantly obvious wrongheaded nature of this distorted "economic" thinking is that the entire future cash flow of the TBTF is based on political risk. It suggests the success of these TBTFs is premised on political corruption. It suggests that the jig could be up at any time a new scandal comes to light--and the roof collpses --a simple example of the absolute dependence of a company's success on political risk factors is FSLR.

The existence of the TBTFs undermines confidence in the economic structure of the country as well as of the system of government itself. The demanded competitive equality og TBTFs with foreign banks could otherwise be described as a call to create a national [nationalized] bank if it is necessary for US operating companies to obtain capital for overseas adventures. Most US companies can peddle their own debt---so perhaps its merely the influence of the TBTF at stake. As a country--the role of banks is to facilitate REAL TRADE--not become a substitute for it.
Posted by OLDER&WISER | Tuesday, April 17 2012 at 10:38AM ET
Too-big-to-fail is a bad policy, and it needs to end and have its ghost exorcised. The failure to end TBTF, and in fact its institutionalization in the Dodd-Frank Act, is one of the worst failings of the Dodd-Frank Act. Curiously, the ICBA endorsed the Dodd-Frank Act, as Secretary Geithner and other Treasury officials never tire of pointing out to Congress. Dodd-Frank should have ended TBTF, and could have ended TBTF, but it did not. End TBTF and then let the markets figure out what is the right mix of banks in America. Left to the markets, the answer will be a broad mix of banks of all sizes and types, matching the great mix of customers in the world's largest economy.
Posted by WayneAbernathy | Tuesday, April 17 2012 at 10:07AM ET
Large Banks are not the problem.

It is short term funding and excessive (trillions mind you) in OTC derivatives. Stablize the funding (liquidity rules under Basel III) and get the Big Banks off their addiction to OTCs (OK for hedging) in the trading book

The failures of Lehman, Bear were due largely to short tern funding issues due to collateral calls. Citi and other TBTF needed TARP due to negative MTM on their OTCs on funding issues in the repo market.

Boring but benefical lending, and deposit taking.
Posted by Old School Banker | Tuesday, April 17 2012 at 10:02AM ET
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