JPMorgan Chase CEO Jamie Dimon has provided little comfort with his recent assurance that taxpayers are no longer on the hook for the nation’s largest and riskiest financial firms. In his annual letter to shareholders, Dimon wrote that not only have post-crisis reforms largely eliminated the chance of a megabank failure, but the reforms would also prevent a domino effect in the financial markets if such a scenario were to occur again. Don’t believe everything you read.

Dimon’s pledge fails to address the increasing concentration of our banking system in the hands of a few multitrillion-dollar financial behemoths. This trend has only been exacerbated by the 2008 Wall Street crisis that, of course, set off the worst economic downturn since the Great Depression and ushered in a wave of new regulations on the community banks that did not cause the crisis. In fact, 0.2% of all U.S. banks hold nearly 70% of industry assets and enjoy the lowest cost of funds in the banking industry despite having the lowest credit quality. This represents a precarious risk to the broader financial sector and an artificial funding advantage subsidized by an implicit taxpayer guarantee.

The letter ignores a long precedent of the federal government stepping in to save troubled megabanks and their creditors. History indicates that not only are financial crises unpredictable, but regulatory safeguards designed for the last crisis fail to stop future ones. As Federal Reserve Bank of Minneapolis President Neel Kashkari wrote in a blog post, governments are quick to rescue those that hold debt in the largest financial firms to ward off contagion and collapse.

JPMorgan Chase CEO Jamie Dimon.
In his letter to shareholders, JPMorgan Chase CEO Jamie Dimon said post-crisis regulatory changes such as the creation of “bail-inable” debt offers taxpayers protection if a big bank fails. But not everyone agrees. Bloomberg News

Meanwhile, concerns remain that the largest banks’ private gains and socialized losses have spawned morally hazardous behavior, in which megabank employees take excessive risks knowing that taxpayers have their backs. Wells Fargo’s phony-accounts scandal demonstrates the harm of the megabanks’ grow-at-all-costs mentality, while the largest banks have repeatedly displayed financial impropriety within a system they are capable of rigging.

No wonder the Federal Reserve Bank of Minneapolis and the Government Accountability Office have concluded that the "too big to fail" problem persists. After all, the Justice Department never brought a case against senior Wall Street executives following the 2008 crisis. At the time, then-U.S. Attorney General Eric Holder admitted that prosecutors held off on megabank prosecutions over fears of the economic impact. Not only are the largest banks too big to fail, they are too big to jail.

To truly address the problem, policymakers should consider: enhanced capital, leverage and liquidity standards, stronger concentration limits, stricter resolution regimes and restrictions on the use of the federal safety net. Additionally, Congress and the administration should continue to pursue regulatory relief for community banks to promote localized banking and economic growth. Community banks reinvest in local communities and offer relationship-based services that incentivize true financial stewardship — something that should be promoted by policymakers, not punished through increasingly burdensome regulations.

Despite the assurances of the chief executive of the nation’s largest financial institution, the “too big to fail” problem remains unsolved. History shows that you simply can’t take everyone at their word.

Camden R. Fine

Camden R. Fine

Camden R. Fine is the president and CEO of the Independent Community Bankers of America.

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