New Year, New Strikes on Big Banks

WASHINGTON – Lawmakers on the Senate Banking Committee criticized the size of the nation’s biggest banks at a hearing last week, setting the tone this year for continuous pressure from Washington to break up or shrink large financial institutions.


Sen. Sherrod Brown (D-Ohio) said it is “unacceptable” that the largest Wall Street banks receive more financial benefits than regional and community banks.

“The largest Wall Street banks are so much larger and more concentrated than they’ve ever been, and because of their size, both their economic clout and their political clout are enhanced,” Brown said. “If we agree that no institution should be too big to fail, if we agree that all bailouts must end, then we must agree that we must do something about this.”

The hearing focused on preventing future bailouts of “too big to fail” financial institutions, which are only getting bigger.

Brown cited research by SNL Financial that indicates the four largest banks control about 42 percent of the banking industry. This number is up from less than 9 percent in 1990.

Between 1990 and 2009, 37 financial institutions merged 33 times to become the nation’s four largest bank holding companies. In 1995, the top six banks had assets equal to 17 percent of GDP. Today, they are more than 60 percent.

“The four largest banks are nearly 40 percent bigger today than they were just five years ago. The six largest banks now control two thirds of the banking assets in this country, a 37 percent increase over where they were just in the last five years,” Sen. Elizabeth Warren (D-Mass.) said. “These banks, in other words, are a whole lot bigger now than they were when we bailed them out in 2008 because they were too big too fail.”

Several lawmakers on the committee have proposed legislation that would limit the size of banks and some of their riskier financial operations.


Warren has introduced a bill that would break up the biggest banks by separating the traditional business of deposit-taking and lending from risky activities like proprietary trading.

Brown and Sen. David Vitter (R-La.) have introduced legislation that would require the largest banks to maintain a 15 percent capital ratio. The bill would also tie the hands of regulators on whether they can pour taxpayer money into failing banks.

During the financial crisis of 2007-2009, the federal government provided more than $1 trillion in loans and hundreds of billions of dollars in capital and guarantees to financial institutions in an effort to stabilize financial markets and the broader economy.

Government assistance was made available to institutions of various sizes, but by the end of 2008 banks with $50 billion or more in total assets were using the program more than smaller firms.

Bloomberg estimates that the terms of the loans provided these banks with a $4.8 billion profit.

The panel also discussed a report by the Government Accountability Office (GAO) that analyzed the economic benefits megabanks received as a result of taxpayer-funded support during the financial crisis.

The GAO analysis found that those banks were able to borrow at lower rates and benefitted disproportionately from bailout programs.

“From participation in these crisis-driven programs, bank holding companies and their subsidiaries experienced individual benefits, including liquidity benefits from programs that allowed them to borrow at lower interest rates in greater quantities and at longer maturities than potential market alternatives,” said Lawrence Evans, director of financial markets at the GAO.


The six largest bank organizations were significant participants in emergency programs, particularly those targeting short-term funding markets. Some also benefited from institution-specific actions, including additional capital injections and guarantees.

Sen. Pat Toomey (R-Penn.), however, downplayed any advantages big banks might receive from the government to finance their operations, attributing their lower funding costs to economies of scale.

“All industries tend to have lower funding costs for larger institutions than smaller institutions across different sectors,” Toomey said.

Evans said the GAO is releasing another report later this year that will attempt to measure any ongoing funding advantages that large firms receive from the government.

Allan Meltzer, an economics professor at Carnegie Mellon University, warned that the more modest role smaller banks play in the nation is changing the social structure of the U.S. economy.

“We’re eliminating the role of community banks. They’re very important for American capitalism because that’s where little businesses start up,” Meltzer said. “Medium-sized banks are almost all gone. They’ve been absorbed by the larger banks. Why were they absorbed by the larger banks? Because the largest banks have an advantage of being too big to fail, so they borrow at lower risk.”

Meltzer said the only way to end “too big to fail” is to adopt and enforce rules that give banks much greater incentives to be prudent and avoid failure. He noted that the Brown-Vitter proposal tackles some of the issues in the 2010 Dodd-Frank bill.


Dodd-Frank has a 78-page section, Title II, devoted to address the issue of “too big to fail” and ensuring that there will never be another Wall Street bailout.

The section allows the Federal Deposit Insurance Company (FDIC) to take over a failing firm and unwind it, potentially with temporary taxpayer support to keep its subsidiaries operating if no other options are available at the time. Critics of Title II argue that it provides discretionary power to the FDIC, encouraging creditors to believe they might continue to receive protection from losses.

All of the economists testifying before the committee said Title II perpetuates the perception that big banks are too big to fail. They also agreed that even if all of Dodd-Frank’s provisions were implemented it would still not solve the too-big-to-fail problem.

“I think we’ve lost the battle against too big to fail mainly because we’ve put the burden on the regulators instead of putting it on the people who make the loans and make the mistakes,” Meltzer said.


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