The Independent Community Bankers of America (ICBA) recently said that there is mounting evidence that too-big-to-fail financial institutions pose risks to the financial system, enjoy a taxpayer-funded funding advantage over smaller institutions and receive favorable treatment from regulators. To address these and other problems posed by the largest and riskiest financial firms, ICBA believes they should be downsized and split up.
“Not a day goes by without new reports on the financial and economic problems caused by too-big-to-fail financial institutions and their government guarantee against failure,” ICBA President and CEO Camden R. Fine said. “These institutions enjoy a privileged position in the financial markets because their size and interconnectedness make them systemically dangerous. Not only has their too-big-to-fail status led to riskier behavior and distorted financial markets—it has a real impact on community banks and their customers on Main Street.”
The latest strike against too-big-to-fail was a Senate Permanent Subcommittee on Investigations report that found that JPMorgan Chase used federally insured deposits to fund a portfolio of complex financial instruments used for risky trades that resulted in billions of dollars in losses. JPMorgan misinformed investors, regulators, lawmakers and taxpayers about the “London Whale” trades and hid $600 million in losses.
Megabanks’ too-big-to-fail status also provides them with a funding advantage over smaller institutions. Federal Deposit Insurance Corp. data show that the megabanks have both the lowest credit quality and the lowest cost of funds in the banking industry, and a May 2012 International Monetary Fund report quantified the funding advantage at $83 billion. Moody’s Investors Services last year said its credit downgrades of the largest financial firms would have been even more substantial if these institutions did not enjoy full government backing.
The largest financial firms also play by a different set of rules when it comes to Justice Department prosecutions. U.S. Attorney General Eric Holder recently testified that their size and interconnectedness inhibits prosecutions on Wall Street, confirming that these institutions operate above the law.
“The too-big-to-fail problem also has a tangible impact on community banks and the communities they serve,” said Bill Loving, president and CEO of Pendleton Community Bank in Franklin, W.Va. “Financial crises caused by too-big-to-fail firms lead to stricter regulations on the entire banking industry, including the Main Street institutions that did not contribute to the calamity. The result: resources that could be used to help local communities and small businesses prosper are instead directed toward regulatory mandates.”