Richard Fisher has once again sounded a familiar clarion call:
"Too big to fail" cannot be a principle the US financial system
continues to abide by.
Speaking at the National Press Club in Washington on Wednesday,
the Federal Reserve Bank of Dallas President said the Dodd-Frank
legislation had done little to alleviate several of the issues
that confront the financial system. He went on to add that if
anything, the law had made things even worse.
The current scheme of things is such that in the absence of a
bailout we would be faced with the collapse of the financial
system as we know it. He went on to emphasize the need to split
banking behemoths into smaller units.
Bank concentration has increased significantly over the years,
particularly from 1970 to 2010. But what is of particular
interest is how sector concentration has changed after the
financial crisis. According to data from the Federal Reserve Bank
of Dallas, the leading 100 banks in the US had an 84% market
share. By the third quarter of 2012, concentration had increased
further. The top 82 banks now had an 88% market share. Given this
situation, if another banking crisis occurs, the impact would be
clearly larger.
Further, Dallas Fed data also shows that Lehman Brothers, which
had to face bankruptcy following the crisis, was a small player
compared to
JPMorgan Chase & Co.
(
JPM
),
Bank of America Corporation
(
BAC
),
The Goldman Sachs Group, Inc.
(
GS
),
Citigroup, Inc.
(
C
) and
Morgan Stanley
(
MS
). This conclusion is based on an analysis of non-deposit
liabilities, subsidiaries and number of countries of operation.
In fact, Lehman didn't even figure in the top ten.
Fisher's call to split up the megabanks seems to have found
support in the actions of Germany's financial markets regulator.
The regulator has asked Deutsche Bank to undertake a simulation
exercise which would examine a scenario where it splits up its
securities and retail business.
However, this proposal, named after Erkki Liikanen, Governor
of the Bank of Finland, would go on to raise costs for clients,
says
Deutsche Bank AG
(
DB
) co-CEO Anshu Jain. Therefore, he says, it should only be
implemented if all banks worldwide have no choice but to comply
with such regulations.
Speaking at a panel discussion in Koenigstein, near Frankfurt,
Jain and JPMorgan's CEO Jamie Dimon said banks and regulators
should work on creating a system where in the event of a crisis,
large banks can close down without damage to the public. These
closures should also happen without the costs associated with the
large bailouts which occurred after 2008's financial crisis.
Dimon added that banks as large as JPMorgan can be shut down
without harming taxpayers. But such a process would require
regulators across countries to work together closely because of
the global nature of these bank's operations. He also said new
capital and liquidity requirements collectively known as Basel
III will further strengthen the banking system.
Fisher wishes to address the situation by clearly defining where
safety nets for the banking system should end. He argues that
only commercial banks would have access to deposit insurance
provided by the Federal Deposit Insurance Corporation (FDIC) and
discount window loans provided by the Federal Reserve.
This would in turn be reinforced by a new disclosure statement
that declares the unprotected status of participants not
protected by the safety net. This includes customers, creditors
and other interested parties.
Jain and Dimon still argue against splitting up larger banks.
Clearly, they offer a wide basket of services which greatly
benefit the economy. They also continuously point to the greater
costs this would entail to clients. Splitting up a megabank,
therefore, may not be the magic wand for the financial system's
problems. Strengthening the regulatory framework and ensuring
more effective implementation may be a more practicable
solution.
BANK OF AMER CP (BAC): Free Stock Analysis
Report
CITIGROUP INC (C): Free Stock Analysis Report
DEUTSCHE BK AG (DB): Free Stock Analysis
Report
GOLDMAN SACHS (GS): Free Stock Analysis
Report
JPMORGAN CHASE (JPM): Free Stock Analysis
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MORGAN STANLEY (MS): Free Stock Analysis
Report
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