Sheila Bair, formerly chairman of the Federal Deposit Insurance Corp. which is responsible for closing banks, says, “It would surely be in the government’s interest to downsize megabanks.”
Easily dismissed is the argument from the megabank lobby American Bankers Association that large, complex business needs large, complex banks to serve them. Banks today join in syndicates to underwrite stock and bonds, and even loan-making for large business; if reduced in size, such syndicates may need to broaden.
Is it un-American to cut down a large bank? Camden Fine, head of the Independent Community Bankers Association, says, “Downsizing too-big-to-fail institutions and the risks they pose to the financial system could not be worse than taxpayers spending trillions of dollars propping up these firms.”
Megabanks have not provided capital more efficiently to the markets and industry. On the contrary, a study from economist Thomas Philippon shows that banks provided cheaper capital for the development of railroads, steel and chemical industries than they provide for current industry.
JP Morgan’s problems join a troubling list. Bank of America constitutes a high risk, according to the NYU Stern school. Citigroup failed a government “stress test” two months ago,. Moody’s is reportedly reviewing 17 major financial institutions for downgrades on their debt, and several stand near junk status.
If Sen. Brown requires crisis to move his legislation, a major firm may unfortunately accommodate.
In 2010, 33 senators supported Sen. Brown’s bank limits bill, including three Republicans. Among them: Sen. Richard Shelby, the ranking member of the Senate Banking Committee. Responsible senators should endorse the SAFE act well before they are compelled by another crisis.
Bartlett Naylor is financial policy advocate for Public Citizen’s Congress Watch