The cost of being big is multiplying, and that's driving a wedge between the largest banks and the next tier.
As the industry's six giants lobby against stricter oversight including vastly higher capital requirements, banks in the next tier are making the case that they should not be saddled with the remedies designed to cure Too Big to Fail.
"We have absolutely nothing in common with the Big Six," one regional bank executive told me. "We won't advocate for a break up, but we are adamant that it's not our fight."
In other words, the regional banks — those that are big-but-not-that-big — are not lobbying against the biggest banks. But they are not defending them either.
That's today's strategy. What happens if the "too big to fail" debate intensifies and legislation appears more likely? And even without new laws, it's clear the rhetoric on Capitol Hill has led federal regulators to conclude that they must do more to tame the threats posed by the largest banks.
So is there a tipping point where it's in the regional banks' interest to lobby against the largest banks?
The largest banks — and several national trade associations — are trying hard to keep everyone on the same page. "There's a lot of talk about speaking with a single voice and standing together, but that's just code for 'do what we say,'" one regional bank lobbyist told me.
I'm not advocating an intra-industry war. Far from it. Banking gets better policy results when it presents a united front to lawmakers and regulators. But this issue — smaller banks facing escalating regulatory costs designed to fix "too big to fail" — has already separated the community banks from the rest of the industry and it's threatening to divide the regionals as well.
Some fissures have already appeared as national trade associations have tried to get members to pay for research on "too big to fail" issues. "If Jamie wants to fund some huge study …he can. We aren't going to cut a check," says one lobbyist referring to JPMorgan Chase's CEO Jamie Dimon.
The Big Six are JPMorgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley. The largest, JPMorgan, has $2.4 trillion of assets; Morgan Stanley is the smallest at $780 billion.
It's a big jump down in size to the seventh spot occupied by USBancorp with $353 billion in assets. From there, five companies top $300 billion; two more have at least $200 billion; and another 11 have at least $100 billion. Below that, 12 banks have at least $50 billion.
These regionals have formed a loose coalition to redefine the concept of "too big to fail" away from size to focus more on what a company does. Their central message is this: complex, interconnected firms with global operations are the only ones that should be subject to any extra requirements designed to tame "too big to fail." Policy should be driven more by a firm's business model than by its size, they contend.
They are making this pitch in meetings with lawmakers and regulators and are writing joint comment letters on policy proposals. Many feel they are making progress in carving out a unique identity for regionals.
But the die is largely cast. The Dodd-Frank Act of 2010 designated any bank over $50 billion of assets as systemically important and therefore subject to all sorts of extra oversight. More and better quality capital, tougher liquidity rules, more stringent risk management, living wills, stress tests and restrictions on products and services are among the law's mandates. This week the Federal Reserve Board said it would charge these banks $440 million more in special fees for their supervision.
Regulators have tried to blunt the impact by tailoring rules to fit a bank's size. The largest banks are held to the highest standards. But that doesn't change the fact that all of these new requirements affect every bank over $50 billion to some degree.
For the largest banks, accepting whatever the regulators come up with is a better alternative to being broken up by government fiat. But that bargain makes less sense for the next-tier banks.
And the situation is only going to get worse as policymakers come up with new ideas on taming "too big to fail."
Federal regulators are expected to require banks to hold long-term unsecured debt at the holding company level. This "bail-in" debt would be converted to equity if one of these behemoths got into trouble.
That's not a problem for the largest banks that already have this debt. But the smaller big banks don't; even Wells Fargo would have to raise it.
Regulators seem determined to get this requirement in place and are working furiously to sort of the details including how much long-term debt will be enough.
Again, the smaller big banks are likely to have to hold less than the largest companies, but any amount is more than they have to hold now.
It's also possible banks will have to pay for "too big to fail" benefits such as lower funding costs. The Government Accounting Office is studying the so-called "subsidy," and its findings may lead lawmakers to recover the advantages via a fee or a tax.
Regulatory costs will continue to rise, for the largest firms and everyone else, but where does it all end? Will it stop when every bank but the Big Six objects? Or until the largest banks voluntarily shrink? What about when returns shrivel and investors desert the industry?
There has to be a better way.