By Terry J. Jorde
With too-big-to-fail financial firms getting soaked by bad press over their risky practices and preferential treatment, it should come as no surprise that they and their supporters have turned the spin machine on high to divert attention. The latest effort came in an op-ed posted on the American Banker website that appears to completely divorce the benefits of being too big to fail from their cause: the size and systemic risks posed by these financial giants.
In the op-ed, attorney George Sutton concludes that three things are driving the growth of large banks: market demand, access to capital and regulatory burden. He is right, but for all the wrong reasons. I would suggest that what is driving the growth of megabanks is market demand because they are too big to fail, access to capital because they are too big to fail, and regulatory burden resulting from the egregious sins of those same banks that are (wait for it) too big to fail.
Sutton writes that the megabanks have advantages over their competitors because the market demands their services and because smaller institutions are hamstrung by regulations. I couldn’t agree more. The problem is the cause of these phenomena. First of all, markets seek out the largest financial firms because they enjoy a government guarantee against failure. We’ve already seen the guarantee in action, and who wouldn’t want to put their money in an institution where risk is virtually eliminated? And why do community banks have this crushing regulatory burden anyway? These burdens are the direct result of the greed of large financial institutions and financial crises they’ve spawned on Wall Street.
Meanwhile, if “diversification is the cardinal rule in investing,” as the author writes, then what justifies a financial system in which a handful of banks control 80 percent of our nation’s economy? That certainly didn’t work well for us in the recent economic meltdown, and the biggest banks have grown 20 percent larger since the crisis. Further, Citi and Chase were not the “source of strength” that helped their banks grow their way out of the crisis. Instead, they collapsed under their own weight, and the American taxpayer was the source of strength that bailed them out.
Finally, the op-ed suggests that if too-big-to-fail financial firms are downsized, financial services will be driven from the regulated banking sector to the unregulated shadow banking industry. Yet Sutton neglects to mention that the five largest bank holding companies controlled 19,654 nonbank subsidiaries as of the second quarter of 2012. Much of the shadow banking world is housed within the very financial conglomerates that seek to blame community banks for suggesting that taxpayer subsidies should not prop up too-big-to-fail institutions.
Let’s get out of the spin cycle. The fact is that the too-big-to-fail banks are too big to manage and too big to regulate. And despite attempts by Wall Street and its apologists to muddy the waters, the crystal-clear truth is that too-big-to-fail distorts the financial markets, puts taxpayers at risk and leads to stricter regulations on the entire banking system. Megabanks must be downsized and restructured so the nation’s community banks and the communities they serve are not hung out to dry.
Terry J. Jorde is ICBA senior executive vice president and chief of staff.