Some cheery news from Bloomberg to start your week: The banks that were “too big to fail” just four years ago are now even bigger than before:
Five banks — JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., and Goldman Sachs Group Inc. — held $8.5 trillion in assets at the end of 2011, equal to 56 percent of the U.S. economy, according to central bankers at the Federal Reserve.
Five years earlier, before the financial crisis, the largest banks’ assets amounted to 43 percent of U.S. output. The Big Five today are about twice as large as they were a decade ago relative to the economy, sparking concern that trouble at a major bank would rock the financial system and force the government to step in as it did in 2007 with the Fed-assisted rescue of Bear Stearns Cos. by JPMorgan and in 2008 with Citigroup and Bank of America after the Lehman Brothers bankruptcy, the largest in U.S. history.
“Market participants believe that nothing has changed, that too-big-to-fail is fully intact,” said Gary Stern, former president of the Federal Reserve Bank of Minneapolis.
But, but, but — Dodd-Frank!
Yeah, about that: President Obama and congressional Democrats — led by two of the central characters in Washington’s part of the financial crisis, Sen. Christopher Dodd and Rep. Barney Frank — decided the way to avoid TBTF in the future was to pass a voluminous law full of new regulations to say, “No bailouts. We mean it this time!”
A “living will” for large banks and new capital and liquidity requirements are not bad things. But they are insufficient to ensure that, in the event of another crisis in financial markets, the feds won’t feel compelled to bail out big banks — putting taxpayers on the hook.
In fact, the Bloomberg story suggests banks and industry observers think nothing has changed as far as the government’s implicit promise to prop up TBTF institutions:
Even with policy makers’ claims that the next crisis will be handled differently, investors still regard the largest banks as protected by an implicit government guarantee. One sign of that attitude is that investors continue to demand from the biggest banks lower interest payments in return for deposits.
That gives larger banks a funding advantage over their smaller rivals. In 2011, funding costs for banks with more than $10 billion in assets were about one-third less than for the smallest banks, according to the FDIC. That gap was only slightly narrower than the 37 percent advantage the largest banks enjoyed when Dodd-Frank was signed.
For 28 global banks in 2009, that benefit translated into a cumulative $250 billion, according to Andrew Haldane, the Bank of England’s executive director for financial stability.
“Markets have come to believe that what the government did in 2008 and 2009 isn’t a one-time deal, that the government will somehow come to the rescue of these big financial firms,” Kevin Warsh, a former member of the Fed’s Board of Governors, said on the March 28 “Charlie Rose” TV show.
Credit-rating companies Standard & Poor’s and Moody’s say they anticipate the U.S. government would rescue large banks in a future crisis. Both cut the major banks’ debt ratings by one level late last year, while retaining them as investment grade credits.
To paraphrase U.S. Chief Justice John Roberts, the way to stop too big to fail is to stop too big to fail. If a bank is so big as to pose a systemic risk to the financial system, no amount of regulatory ingenuity — however well-intentioned and clever — will be sufficient. And regulators, like some generals, tend to fight the last war. That means the demands they’re placing on banks might help prevent an exact rerun of the 2007-08 financial crisis, but may well create new blind spots or incentives for risk-taking that aren’t apparent until it’s once again too late.
I used to write about antitrust cases in Europe and generally think most antitrust actions are misguided, short-sighted, politically motivated, futile, or some combination thereof. But if the U.S. government is going to use the force of law in an effort to prevent taxpayer bailouts of banks, I tend to favor using the power of antitrust to keep banks below a certain market share. Yes, that means forgoing some efficiencies and capabilities that mega-banks have — and no, I don’t have a particular threshold in mind. But it would be preferable to institutionalizing TBTF, as Dodd-Frank appears to have done.
(Forgotten in haste and now added: H/t to Ed Morrissey at Hot Air)
– By Kyle Wingfield