BANKTHINK

A Subsidy of Any Size Is Still Too Big

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.

Comments (5)
Time would be better spent keeping the small banks alive rather than arguing that the largest banks have a financing advantage. Shouldn't the focus of the ICBA be on permitting new bank charters, limiting and simplifying small bank regulation, equalizing small/big bank capital requirements, regulating shadow bank competitors, sponsoring small bank access to advanced payment system technology etc. Remember who your clients are and their number is diminishing daily.
Posted by Rhsmith999 | Friday, August 01 2014 at 4:16PM ET
Rhsmith999's litany of "shiny objects" are merely distractions from the main event...the thumb of big government on the scales of competition in support of the Red Phone Banks. ICBA is right to keep its eye on the prize.

Cornelius Hurley
Boston University
Posted by hurley | Monday, August 04 2014 at 7:07AM ET
I agree with Cornelius Hurley: ICBA should focus on the big threat not just to protect his members, but because they cannot thrive in an environment dominated by banks that treat the Fed as their private reserve.

ICBA would do well to reach out to all of the people on the same side of the issue, including those who, like me, think that a crucial but always ignored issue is the vast concentration of wealth in the hands of a very few entities. As Thomas Piketty explains in Capital in the Twenty-First Century, the biggest threat to democracy is the domination of politics by a few very rich entities and people.
Posted by Ed Walker | Monday, August 04 2014 at 12:47PM ET
I agree wholeheartedly with Mr. Fine. The new GAO Report demonstrates that the government bailout of the mega-banks that precipitated the Financial Crisis continues 6 years later. Federal regulators 'tough talk' about discouraging banks from being Too Big To Fail, remains just that. Talk.

In reality, federal regulators helped these casino-like entities masquerading as government-insured banks grow almost 40% larger than when they took the US financial system to the brink of collapse.

Over those same 6 years, federal regulators ignored the special needs of smaller institutions caused by the mortgage meltdown, real estate market collapse, credit freeze and subsequent Crisis triggered by the irresponsibility of mega-banks. Preferring to close down smaller banks by the hundreds, thereby concentrating more industry assets in big banks that had become Too Big To Behave.

The mega-banks have been coddled way too long. It is long past time to eliminate the subsidy resulting from the federal government's compromise of free-market economics that would have eliminated at least two weak banks and demonstrated that regulators possessed both the ability and the will to close down banks that get themselves into serious trouble.

Short of re-instituting the Glass-Steagall Act, FDIC Vice-Chair Hoenig's proposal deserves immediate attention to return banking to an activity that deserves government insurance and to separate banking from the gambling activities that place the mega-institutions at risk of loss while doing nothing to improve the financial condition of average Americans.
Posted by jim_wells | Monday, August 04 2014 at 6:04PM ET
I offer 2 observations:

1) Since when does the achievement of a competitive advantage become twisted into being reframed as a 'subsidy'. This is beyond absurd and renders the remainder of the argument null and void.

2) The irony of ICBA - a full time lobby machine that exists for the sole purpose of winning subsidies - suggesting that someone else's alleged subsidy is unfair is not lost on this reader. Hopefully others will see through this shameless and blatantly political farce.
Posted by Serge Milman | Optirate | Monday, August 04 2014 at 10:52PM ET
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