Big banks are having a tough season. Besides ongoing hits from Wall Street, low interest rates, and litigation expenses, the presidential candidates are now kicking around the big bank political football.
The big bank blitz started early last year when both President Obama and the then Democrat-controlled Senate proposed a big bank tax fee. The most extreme version of it was put forward by populist candidate Bernie Sanders who called for a broader tax on financial transactions, reinstating Glass-Steagall and breaking up our biggest banks.
Hillary Clinton’s recently proposed big bank “risk fee” did not go that far, but is clearly more aggressive than Obama’s plan. It is an improvement because she at least considers risk, but it is still far short of a truly winning solution to the “too big to fail” problem. Before we look at what that should be, let’s summarize what it should not be:
- It should not be punitive on commercial banks alone, because so many other non-bank entities were complicit in the financial crisis, not to mention many of the regulators themselves.
- It should not be discriminatory by focusing on big banks alone, because almost all the recent bank failures were community banks. Bankers at big banks do not have a monopoly on making bad business decisions. What may be a big bank tax for now may soon trickle down to mid-sized and smaller banks once the politicians see this new revenue source.
- It should not be anti-growth by ultimately restricting critically needed bank lending to keep our fragile economic recovery going. While it is politically expedient to beat up on banks, especially big ones, their lending is the lifeblood of our economy. The Top Ten bank companies alone control half of all bank deposits, so squeezing them squeezes our economy. Crippling banks with unwise and inefficient regulations on top of the continually unfolding Dodd-Frank regulatory infrastructure will only serve to further cripple bank lending.
- It should not create a new tax or require a new or expanded regulatory infrastructure to administer and enforce the tax. Countless studies have shown that new and increased taxes on businesses may help win votes but are usually counterproductive by ultimately hurting the economy and its workforce (i.e., the voters themselves).
- It should not be size-based but rather totally risk based. Clinton gets an “A” for effort in this regard but nothing else, since her bank tax plan, like most others, is punitive, discriminatory, and ultimately detrimental to bank lending and economic growth.
Like football, the winning game plan is not based on crowd-pleasing gimmicks or trick plays but the execution of the basics. In banking this means focusing on the time-tested risk-return tradeoff and restructuring our existing deposit insurance system to be truly risk based.
For example, in addition to regular premiums, special risk premiums for all banks, regardless of size, with a targeted risk profile such as subprime lending, rapid growth, or de novo status, could be assessed a 3-basis-point annual surcharge. TBTF banks, in addition to regular premiums, could be charged another 3- to 8-basis-point special assessment based on total assets, depending on their risk profile. The new premiums would be at market rates, based on recent studies of the value of the TBTF subsidy and other actuarial studies of risk exposure.
These market-based TBTF assessments, which would neither be punitive nor discriminatory, would be more bearable to big banks than a tax and allow them to do what they do best — make loans and help grow our economy. The assessments go to the Federal Deposit Insurance Corp. to strengthen its Deposit Insurance Fund rather than a tax going to the Treasury.
This winning playbook is nothing new, as it has been on the FDIC’s website collecting Internet dust for 15 years since I made the above proposals and more in testimony before the FDIC Board and Congress in both 2000 and 1995.
These reforms were never seriously considered because the industry, especially the big banks, convinced the FDIC and Congress they were unnecessary. Now that big banks are facing serious new tax proposals from an increasing number of presidential candidates, perhaps they will realize that such a truly reformed deposit insurance system is the most efficient way to deal with the TBTF issue. Better yet, perhaps one of the candidates will consider dusting off this old playbook?
Kenneth H. Thomas, an independent bank consultant and economist, was a lecturer
in finance at the University of Pennsylvania's Wharton School for over 40 years.