Too big to say no to

Banking news of note this past week:

  • A bill to allow bankruptcy court judges to modify the terms of troubled mortgages, “cramming down” the amounts owed so as to avoid foreclosures and make these debts and troubled assets more manageable, failed in the Senate, getting just 45 votes.   En route to the bill’s failure, its chief sponsor, Sen. Dick Durbin (D-IL) said the banks “are still the most powerful lobby on Capitol Hill. And they frankly own the place.”  The NYT noted that the White House, despite backing the bill, did not go to bat for it in its final days.
  • The Treasury has delayed the release of its “stress tests” of the 19 largest banks, apparently because their credulous-looking certification that all 19 banks are currently solvent is not rosy enough for some of the banks, notably Citigroup.  Word is that Citi and Bank of America are contesting the results, even though the tests (1) appear to have used the banks’ own questionable data on the values of their toxic assets and (2) minimize the amount of hypothetical “stress” these banks might be subject to, by entertaining only fairly optimistic worst-case scenarios.  Various economists have said the tests were rigged in the banks’ favor, but evidently some banks are pushing to make them even more so.  Yves Smith offers the full bill of indictment here.

Oh, and the White House has explicitly ruled out letting any big banks fail:

‘Administration officials have said they will not allow any large bank to fail even if the economy takes another turn for the worse and they must go back to Congress for more money.’

Washington, we have a problem.  The big banks are not only too big (as in too systemically important) to fail, but also too big (as in too politically powerful) to regulate.   It’s hard to see this Congress passing meaningful regulation, be it granting the FDIC new powers to close insolvent financial conglomerates; a resolution framework or exit strategy for bailed-out financial giants, as suggested by Kansas City Fed President Thomas Hoenig; or quasi-antitrust action to break up the big banks so that none of them remain too big to fail, as suggested by Willem Buiter.

Buiter’s proposal is particularly interesting in light of his supporting comment that a bank exhausts its scale economies well before it gets to $100 million in assets.  Whereas the 19 largest banks have over $100 billion in assets.  In fact, according to recent FDIC data, more than 4,000 U.S. banks have over $100 million in assets.  So well over half of all U.S. banks are bigger than they need to be, if that $100 million threshold is correct.  (Buiter didn’t provide a source for that number, but a Google Scholar search revealed a vast literature on bank economies of scale, and the usual finding does seem to be that scale economies are exhausted early.)  The question then becomes, how big is too big?  I’d wager the answer has less to do with systemic importance (Warren Buffett said the other day that he thought only two U.S. banks are truly too big to fail) than excessive political power.  How do we get to a point where the banks don’t own Congress?  Or is that too much to wish for?

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One Response to “Too big to say no to”

  1. euandus Says:

    Consider the presumptuousness in the banking lobby involving itself and insisting that its interests be served in Congress as it fashions financial regulatory reform. That they are in any position to be part of that process is beyond at least John Galbraith. If you are interested, here is my post:

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