Debating the Advantages of Big, Connected Banks: The debate over "too big to fail" comes in many incarnations, as evident on BankThink this week. Finance professor Benjamin Blau shared new research published by George Mason University's Mercatus Center finding banks that lobby are more likely to get emergency loans from the Federal Reserve. "One possibility [why] is that politically connected firms might simply be the types of firms that are more willing to participate in government-sponsored programs like the Fed's emergency lending facilities," he wrote. "Another, perhaps more disturbing, possibility is that banks might view their political connections as an insurance policy, which may encourage more reckless or risky behavior." Some readers agreed with this interpretation. But Wayne Abernathy of the American Bankers Association argued there were other reasons why the Fed and big banks were tied together. "The Fed was created 100 years ago by the Congress to stabilize the money supply that flows through and is affected by the banking system," Abernathy wrote. "If the Fed wants to carry out that mandate, it is going to do so through the banks that have the largest influence in the national markets." Elsewhere, Abby McCloskey, program director of economic policy at the American Enterprise Institute, argued that an $83 billion big-bank subsidy calculated by Bloomberg News could actually be a $14 billion disadvantage if you measure bank funding levels at normal, as opposed to crisis, times, and if one accounts for Dodd-Frank compliance costs. "Hopefully, the [forthcoming] GAO report brings more clarity to the size, fluctuation and source of the subsidy," she concluded. "As of now, there are plenty of reasons to reform the U.S. banking industry. An $83 billion subsidy estimate should not be one of them."

Whither Wall Street? American Banker Editor in Chief Neil Weinberg earned a lot of kudos from readers for his post outlining where wrongdoing still thrived on Wall Street. "Neil, this is an excellent summary," one commenter wrote. "You get it! Now the question is how many other bankers out there are finally starting to." But one reader thought Wall Street didn't necessarily deserve to be put through the wringer. "For every argument here, and there are many of them, there are counterarguments," he wrote. "No doubt there are bad actors who have not been held accountable on Wall Street, but there are just as many in Congress, regulatory roles and even journalism." 

Mortgage Market Morass:Several BankThink contributors weighed in on what can be done to ensure the viability of the U.S. mortgage market. Kevin Villani, former Freddie Mac economist, argued higher capital requirements for the GSEs, more stringent equity requirements for borrowers and a heightened reliance on private markets would help protect taxpayers from paying for future bailouts. Consultant Timothy Lee suggested other federal mortgage guarantors, including the FHA, USDA and VA, adopt new quality controls the GSEs are applying to their reps-and-warrants frameworks, while Risk Doctor columnist Cliff Rossi championed a complete overhaul in this area of the mortgage market. "There is little standardization or clarity in how loans are vetted against contractual reps and warrants, beckoning a significant outbreak of put-back mania sometime after the next boom-and-bust cycle," Rossi explained.

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