Emergency interventions in 2008 prevented the financial crisis from escalating to Depression-like proportions. But one consequence of those actions, either unintended or brushed aside by policymakers at the time, spells trouble for the U.S. banking system and its ability to fuel economic growth.
The biggest banks have gotten bigger, controlling market shares well beyond modern norms. This happened despite much discussion and concern about banks that are too big to fail, implicitly assured that the government stands ready to bail them out. The potential impact of a big bank collapse comes on top of a 20-year trend in which the share of deposits held by the top five U.S. banks has climbed from about 10 percent to nearly 50 percent.
Federal Reserve Bank of Kansas City president Thomas Hoenig points out that the five biggest institutions have increased their assets by 20 percent since before the crisis, to $8.6 trillion. That’s equal to roughly 60 percent of gross domestic product; Hoenig would be more comfortable with the 15 percent ratio that prevailed in the early 1990s.
According to Federal Deposit Insurance Corp. data for 2009, Bank of America Corp. and Wells Fargo & Co., after completing opportunistic takeovers during the crisis period, each had exceeded the 10 percent statutory limit on domestic deposits. Jamie Dimon, CEO of JPMorgan Chase, which held to just under 10 percent, has emerged as an unabashed champion of bigness. He argues that a bank like his can offer a breadth of services and achieve economies of scale that smaller firms cannot rival. A New York Times article in December quoted Dimon as saying a 30 percent share would be workable, though he also asserted, “No one should be too big to fail.”
Double-digit market shares may not cause alarm in Australia, Canada, France and other countries that have long had high concentrations of assets in a handful of institutions, in some cases by encouraging “national champions” to carry their flags on the world financial stage. Indeed, Dimon sees JPMorgan competing in that league against the likes of BNP Paribas and Deutsche Bank.
But bigness, while not inherently a bad thing in an international context, goes against the grain of historical U.S. populism. This wariness of concentrated economic power is evident in the decentralized Federal Reserve System with its 12 regional banks, one of which gives Hoenig his platform to make the case for the Main Street banks in his district versus the Wall Street behemoths he says have been “inadvertently granted implied guarantees and favors, and we have suffered the consequences.”
Introducing the first draft of last year’s reform legislation, President Obama struck a similar populist pose, saying of the “army of lobbyists” opposing reforms, “If these folks want a fight, it’s a fight I’m ready to have.”
Tensions in banking between big and small have been a constant for decades, and at least arguably constructive. A few recessionary glitches and lesser crises aside, the relatively unconcentrated U.S. banking system and the economy it financed led the world for well over half a century, until the wake-up calls of 2007–’08 and the ensuing contraction in loan demand. The frequency of crises and volatility has increased as the biggest banks have grown.
Amid the rush to implement the Troubled Asset Relief Program and related measures, and subsequently Congress’s heavy lifting to pass the Dodd-Frank Wall Street Reform and Consumer Protection Act, the accelerated stratification of the industry was “a key macro point that went missing,” says Paul Merski, senior vice president and chief economist of the Independent Community Bankers of America. “There needs to be an ongoing policy debate,” says the small-bank advocate. He expects no “break up the banks” movement, as some suggested earlier last year — a movement that might be revived in the U.K. pending a commission study later this year. But he is hopeful that actions of the Financial Stability Oversight Council, the new U.S. systemic risk watchdog, will effectively rein in the biggest institutions.
Former regulator Eugene Ludwig, CEO of Washington-based consulting firm Promontory Financial Group, says the FSOC is still in its infancy and “deep into the regulation-writing process,” so it may take time to get around to more-visionary and more-macro concerns. But, he adds, “there has not been enough granular focus on how to protect and encourage a robust community banking sector.”
As it stands, says Ludwig, all banks face higher regulatory and capital costs, cutting into profits. “Banks react to these kinds of things by shrinking, which means less loan availability,” he warns. “That affects the real economy materially.”
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