A new report from the Government Accountability Office finds that the size of big bank subsidies has diminished since the crisis. That may be the case—but the larger point is that the biggest and riskiest financial firms still have a competitive advantage in the marketplace. They can still access subsidized funding more cheaply than smaller financial firms because creditors believe the government would bail them out in the event of a crisis.
No matter how you cut it, a subsidy is a subsidy. And this subsidy is one that puts the American taxpayer on the hook.
The report also shows that the size of the subsidy falls in relatively stable periods and increases in times of stress. This means that the value of being too-big-to-fail increased significantly during the financial crisis, and would do the same in subsequent downturns.
There's no question that another crisis will occur—it's only a matter of when. Meanwhile, the largest financial institutions are only getting bigger. According to our analysis of call report data from the Federal Deposit Insurance Corp., since the end of 2009, the assets of the six largest financial institutions have grown each year. Their total assets rose from $6.41 trillion in 2009 to $7.22 trillion in 2014—a total increase of $800 billion. The top six banks are also responsible for more than half of the $2 trillion increase in total U.S. banking assets in the years since 2009.
Logic suggests that it would behoove us to put an end to something bad before it gets even worse. That is why the Independent Community Bankers of America supports real reforms that tackle too-big-to-fail, such as the Terminating Bailouts for Taxpayer Fairness Act, introduced by Sens. Sherrod Brown, D-Ohio, and David Vitter, R-La. The TBTF Act would require the largest and riskiest banks to hold more leverage equity capital to reduce their risks and avoid future taxpayer bailouts.
Additionally, ICBA supports the Subsidy Reserve Act of 2013, which would require TBTF banks and firms to establish and maintain a reserve to be funded annually in the amount of their subsidy. We also support a range of other proposed solutions to the too-big-to-fail problem, including the proposals of FDIC vice chairman Thomas Hoenig and Federal Reserve Bank of Dallas president and chief executive Richard Fisher.
Hoenig’s proposal would separate the core banking activities of deposit-taking and lending, which are covered by FDIC deposit insurance, from dealing and market making, brokerage and proprietary trading. Fisher’s proposal would restructure too-big-to-fail financial institutions into multiple business entities and limit the federal safety net—FDIC insurance and access to the Federal Reserve discount window—to those entities that practice commercial banking.
Today’s GAO report reiterates the importance of ending the too-big-to-fail epidemic. It is necessary for the long-term health of America’s communities, not only today but in the generations to come.
Camden R. Fine is president and CEO of the Independent Community Bankers of America.