#243. How big is too big?

Posted on | The Agurban

How big is too big?The August 28, 2009, Washington Post had a very interesting article about the government’s willingness to allow a handful of financial institutions to not only be deemed “too big to fail” but to allow these same institutions to continue to grow in size and power.

It has been my observation from travelling around the USA studying small towns and also building manufacturing plants in small towns that those communities that are dependent upon only the large banks are at a serious disadvantage when trying to grow their jobs and opportunities.

Developing new entrepreneurial businesses is dependent upon financing and I have found that many of these larger banks have essentially “red-lined” or forbidden lending to many rural areas.  Having worked and travelled extensively overseas, I’ve seen firsthand how development often slows or stops when the financial power is concentrated in a handful of banks.  The USA’s widely diverse financial sector is one of the major positives for future growth.  It would be a shame to see this change in the future.

Following are some of the items that I thought particularly interesting in the Post article:

  • * JP Morgan Chase, Bank of America, Wells Fargo and Citigroup now issue one of every two mortgages and about two of every three credit cards.
  • * No consequence of the crisis alarms top regulators more than having banks that were already too big to fail grow even larger and more interconnected.
  • * Big banks will assume they always have the government’s backing if things go wrong. That presumed guarantee means large companies could return to the risky behavior that led to the crisis if they figure federal officials will clean up their mess.
  • * Fresh data from the FDIC show that big banks have the ability to borrow more cheaply than their peers because creditors assume these large companies are not at risk of failing.
  • * “To favor one class of financial institutions over another class skews the market. You don’t have a free market; you have a government-favored market,” comments Camden Fine, President of Independent Bankers of America. “We will never have free markets again if you have the government picking winners and losers.”

Here’s my suggestion to the regulators in DC.  If a bank has more than 3 – 5% of national deposits and is deemed “too big to fail” require them to have 15% to 20% equity capital rather than as low as 4% currently.  At those capital levels they would have much less chance of failing and the markets would quickly figure out that they could be much more profitable below that 5% national threshold.  The big banks would shrink themselves in size and more competition would result.

If you have a locally owned bank in your town, call your local banker and thank them for what they do.  Even though they might be ‘small enough to fail’, they would be ‘too embarrassed to fail’.  And, they are doing great things with growing jobs and opportunities.