-
A new government report finds that the size of big bank subsidies falls in stable periods and increases in times of stress. That spells danger when the next crisis comes around, writes Independent Community Bankers of America chief Camden Fine.
August 1 -
A highly anticipated report by the Government Accountability Office has found that the subsidy large banks receive for their size has been reduced or even eliminated since the financial crisis.
July 31 -
The largest and most powerful arm of the central bank of the U.S. has finally admitted the megabank emperors have no clothes. It is past time that we as a nation get to the bottom of this dangerous threat and fix it
April 3 -
Dodd-Frank went a long way toward ending too-big-to-fail. Since large, diversified financial institutions provide significant economic value to clients, the likely effect of arbitrary and preemptive break-ups would be to concede global financial leadership to other jurisdictions.
April 30
The findings of last week's government report on big bank subsidies were misconstrued in a recent
The GAO was asked by Sens. Sherrod Brown, D-Ohio, and David Vitter, R-La., to study whether the six largest banking companies enjoy a cost of funding differential over smaller institutions stemming from investors' expectation of future bailouts. If a funding differential could be linked to bailout expectations, the difference could justifiably be characterized as a kind of "subsidy."
Mr. Fine acknowledges that the GAO's report "finds that the size of big bank subsidies has diminished since the crisis." But he then asserts that large banks "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."
Actually, the GAO not only found that any large bank cost of funding differential had diminished since 2007 the differential may have actually reversed so that large banks are now at a disadvantage. In
Mr. Fine also asserts that "the value of being too-big-to-fail increased significantly during the financial crisis, and would do the same in subsequent downturns." But in the years since 2009, significant statutory, regulatory, and industry changes have been made to ensure that no institution is too big to fail and that taxpayers are never again put at risk. Moreover, there is zero appetite in Congress, among regulators, or among the American people to ever again bail out a failing bank. If depositors and investors were to flock to large banks in a future crisis, it would be because large banks offer strength, diversity and liquidity not because of expectations of bailouts. Investors seek shelter in Treasury securities during a crisis for the same reason.
With all this in mind, it is misguided to support legislative efforts that would require banks to hold dramatically higher capital or forcibly break them up. Banks are already holding capital at or near record highs. Further hiking up requirements would diminish banks' ability to lend to working families and businesses, undermining the ongoing economic recovery.
Similarly, dismantling highly diversified banks would undermine financial stability. Diversification is a hallmark of sound investing and institutional and systemic stability. Breaking up large, multi-faceted institutions would produce less diversified, more concentrated components that could be more prone to sudden shock and instability.
The GAO report demonstrates that our financial system is stronger, more resilient and more fair today than it was in 2007. That said, I am in strong agreement with Mr. Fine about the urgent need for
Rob Nichols is the president and chief executive of the Financial Services Forum.