The Independent Community Bankers of America (ICBA) has released “End Too-Big-To-Fail,” a report that examines the impact of too-big-to-fail financial institutions on the U.S. economy and why too-big-to-fail must be brought to an end now. In the report, ICBA also highlights the Terminating Bailouts for Taxpayer Fairness Act of 2013 (TBTF Act, S. 798), introduced by Sens. Sherrod Brown (D-OH) and David Vitter (R-LA), as a valid solution to curb the too-big-to-fail epidemic. The document also addresses common myths and facts about the legislation.
“ICBA is pleased to unveil this comprehensive report, which is an excellent roadmap for helping everyone from consumers to policymakers understand how too-big-to-fail affects our nation’s economy and what they can do to help bring an end to this dangerous practice,” ICBA President and CEO Camden R. Fine said. “As we outline in the report, too-big-to-fail distorts free markets, incentivizes risky behavior, holds taxpayers hostage to bailouts, and creates unfair competitive advantages for the largest banks. But there is perhaps no greater reminder of the too-big-to-fail impact than the constant, oppressive regulatory burdens that community banks face on a daily basis. I encourage everyone who feels passionately about the health of our financial system to read this timely report.”
Key highlights from ICBA’s report include:
The megabanks have become even larger since the financial meltdown. In fact, the 12 largest U.S. banks, or 0.2 percent of all U.S. banks, hold nearly 70 percent of industry assets, dwarfing the rest of the banking system and representing massive systemic risk. Because these firms are too big to fail, they court risks that no smaller firm would tolerate and act with impunity. The markets offer them credit at rates that do not reflect their true risk—rates that are subsidized by an implicit taxpayer guarantee.
This too-big-to-fail subsidy, valued at $83 billion annually by two economists with the International Monetary Fund and Bloomberg View, creates a competitive imbalance. The megabanks use the subsidy to unfairly compete, profit and grow even larger, exacerbating industry consolidation.The Justice Department knows they’re too big to fail, as Attorney General Eric Holder recently admitted before the Senate Judiciary Committee. Worries about destabilizing the megabanks mean they are effectively immune from prosecution. When the too-big-to-fail banks are above the law, they’re too big to jail.
The banking industry is becoming more concentrated, and the trend will only continue as long as too-big-to-fail exists. The bigger and more complex the megabanks become, the more damage their failure would cause and the more surely they will be bailed out and immune from prosecution. The bigger and more complex they get, the harder they are to manage and the more likely they are to stumble and need another bailout. It’s a vicious circle.
There are significant other sources of credit for businesses, including community and regional banks. Community banks already finance more than 55 percent of small-business loans under $1 million and have sufficient capacity to lend more.
Even if the six largest banks split themselves into 20 banks due to stricter capital guidelines, lending may well be redistributed among these new banks, but it will not be reduced in the aggregate. In fact, the increased competition and innovation would likely result in more lending, more jobs and greater economic growth.
ICBA has endorsed the Terminating Bailouts for Taxpayer Fairness (TBTF) Act (S. 798), introduced by Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.). Brown-Vitter takes a clean approach to the problem—requiring the largest, riskiest banks to hold more leverage equity capital will allow them to operate more safely, absorb more losses and avoid a government or taxpayer bailout. S. 798 can be implemented without complex new rules.
By taking bold steps to end too-big-to-fail, the United States would be acting as a leader in global banking reform, and the increased safety and transparency of our banking system would make our banks more competitive globally, not less.
“Banks should exist to serve the economy, to provide the credit and other financial services that help launch and expand businesses and create new jobs,” ICBA said in the report. “A robust market for financial services helps consumers obtain home mortgages and other loans at competitive rates and on customized terms. When banks compete freely, consumers have access to a range of solutions for savings and investment.”
ICBA closed the report by encouraging others to join the association in pushing for vigorous but practical solutions that will restore a free and safe market for financial services and tap the true potential of the American economy.