Are Giant Banks Indispensable? No, Says Big Business

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Big banks love their biggest customers, but the feeling isn't always mutual.

That has become evident as the nation's largest banks try to fend off a fresh wave of criticism that their size and marriage of investment and commercial banking pose a grave risk to the financial system.

In their defense, the big banks' trade groups and executives have argued that their very size is a huge asset to the economy. Banks with more than $50 billion of assets "provide $50 billion to $110 billion annually in benefits to companies, consumers and governments," the Clearing House asserted last month in defending big banks' "social utility."

JPMorgan Chase (JPM) Chief Executive Jamie Dimon has argued that big corporate customers rely heavily on the sophisticated financial services only megabanks can provide, including big loans, global cash management and deal advice.

"We bank some of the largest global multinationals in America and around the world," Dimon testified at a Senate Banking Committee hearing in June on JPMorgan's massive trading losses. "We can do $5 billion revolvers or raise money for America's Fortune 100 companies in a day or two when they needed to do something. …These are services they need."

Claiming big multinationals "need" big banks might be a bit of an exaggeration, say treasurers at those large companies. Yes, a separation of banks' commercial and capital markets operations would inconvenience big businesses and raise costs, corporate treasurers and their representatives acknowledge. But for big businesses there are downsides to dealing with giant financial firms as well—and they are in no rush to defend the megabanks.

"Is it going to have a material detrimental impact on corporate America if they were broken up? I doubt that," says Jeff A. Glenzer, who oversees public policy for the Association for Financial Professionals, which represents corporate financial executives.

"I have not heard" the association's members voice any support for big banks nor demand a breakup, he says.

Nobody interviewed for this article advocated breaking up big banks, but corporate officials carefully expressed frustrations with the side effects of the megabanks' heft. The growing concentration of banking industry assets since the financial crisis has made dealing with the largest banks inevitable for many companies — and often requires buying a bundle of services to get the best deals on credit.

"For years now there's been a trend of banks making credit commitments as part of an overall decision on the profitability of a client. That includes a mix of credit business and fee-generating business," says Thomas C. Deas, Jr., the treasurer of chemical company FMC Corp. (FMC) and the chairman of the National Association of Corporate Treasurers, a trade group.

FMC, which reported revenue of $3.4 billion last year, is a "capital-intensive business" with a regular need for credit, he says. But when the company renegotiated a $1.5 billion credit facility with a group of banks last year, some lenders dropped out in what Deas calls "a self-selection process by banks who felt that the balance between credit commitment and fee-generating business was not in balance to their liking."

"There's a finite set of services that a company like FMC needs in cash management, in international banking services, in trade finance, foreign exchange, debt underwriting — all those ancillary services on which banks get additional fees," he says. "The trend in order to achieve this balance has resulted in a smaller group of more capable banks making bigger individual credit commitments."

Corporate treasurers and their representatives agree with the big banks' arguments to a point.

Big banks "have taken reputational black eyes. … Nonetheless, the largest banks still remain because of what they are able to offer," Glenzer says. Because of "the relative simplicity compared to having to deal with a large portfolio of smaller banks, they're still the banks of choice for most of corporate America."

He cites the megabanks' size and scale as advantages in helping big companies raise capital, manage risk and implement technology: "The large banks are the ones best able to justify investments into the technology that supports the other needs of large corporations. That's simply a matter of economies of scale, whether it's investing in payments technologies or information reporting technologies or supply chain finance technologies."

Deas agrees, citing the higher lending levels that companies like FMC can get from the largest banks. "Treasurers of U.S.-based multinationals rely on large banks able to provide global services and credit support around the world," he says, adding that FMC's $1.5 billion revolving credit line has commitments from most of the largest banks, including Citigroup, JPMorgan, Bank of America and Wells Fargo (WFC).

"This structure would not be supported by breaking up banks with the consequent lower statutory lending limits," Deas says.

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Comments (3)
Once you get past the headline, which sets up a strawman, the article does a very good job of making the case why America needs banks of all sizes and shapes and business models--largely because that is also a good description of business customers in America. "Indispensable"? No company in America should be "indispensable". But the article makes a good case that large banks are useful and valuable and helpful to large firms. Could large businesses manage without large American banks? Of course they would. They would have to. The question is, how would they manage? In part, they would manage as they do today and how many were increasingly doing before enactment of the Gramm-Leach-Bliley Act, by taking much of their business to securities, insurance, and other non-bank financial firms. And they would take a lot of their business to non-U.S. banks, who are eager to step in. Are large businesses effusive in their praise of large banks? Why should they be. In fact, though, they use them, a lot, but they would also like more competitors. So would we all. Breaking up the big banks would actually reduce the competitors for the business of the largest non-financial firms, leaving them to try to cobble together syndicates, divide up their work into smaller bites, and ring up the friendly Chinese, French, German, and British banks. The article establishes clearly, though, that this would not be better.
Posted by WayneAbernathy | Tuesday, August 21 2012 at 2:22PM ET
Both Ms. Aspan's article and the comment by aberw are excellent. They accurately sum up the issues and my own experience within a bank that claimed it had to be large in order to service its corporate clients. While there does tend to be a little fantasy on the part of banks--corporate customers used to laugh and tell us they would never have an exclusive relationship with just one bank--scale is certainly important in this business. The only question I would add is "how much scale"? Most of today's giant banks have progressed well beyond the size necessary for efficient (and safe) global cash management, credit syndication and investment banking purposes. We should not overlook the additional risks posed by such banks. When all goes well, this is one thing. If things go wrong, the large banks inevitably need public help, and their failure can also create major problems for their corporate customers. In other words, there are a number of concerns that go beyond the mere issues of customer service and competitiveness. And just because the foreign banks are way too large does not mean we should accept the situation in the name of competition. The US would have plenty of tools at its disposal to insist on global size reduction if it actually had the will to do so.
Posted by Lawrence Baxter | Tuesday, August 21 2012 at 2:58PM ET
Despite what Jamie Dimon might think, size cannot possibly compensate for the growing lack of honesty and integrity in the Too Big To Behave Banks. The recent financial crisis demonstrated that these institutions were willing to forsake their principles in blind pursuit of greed. They made mortgages to people who could not afford them. They bundled these questionable mortgages into securities designed to fail. They lied to investors about the questionable quality of these securities. They bet against the investors who bought these securities. And they precipitated the worst economic disaster in the US since the Great Depression -- causing millions of Americans their jobs, their homes and their life savings. In the process, they destroyed decades of trust and good will amongst consumers and businesses. The comments of corporate officers in this article show that banks are now viewed as vendors. Vendors that need to be watched closely to ensure that they have minimal opportunity to victimize their customers.
Posted by jim_wells | Wednesday, August 22 2012 at 8:04AM ET
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