A dozen U.S. mega-banks – 0.2 per cent in terms of numbers of all banks – currently control 70 per cent of all assets in the U.S. banking industry. These mega-banks – deemed to be too-big-to-fail, are treated entirely differently from the rest of the industry. They are exempt from the normal processes of bankruptcy and fear of failure. This dirty dozen and all its counter-parties are free to take excessive risks rightly denied to their competitors.
In the absence of the rule of law, the playing field is uneven within the banking industry, and Main Street remains fundamentally vulnerable to the whims of Wall Street. Dodds-Frank, funded by big bank campaign contributions, corruptly locked in the privileges of the few and deliberately exposed the U.S. economy to a repeat of the 2008 fiasco.
Three reforms would restore the rule of law to the banking industry, and would go far to restoring Main Street confidence in the financial system. They are not easy to introduce because the mega-banks will lobby vigorously against them. But a political opportunity exists because many voters remain outraged by the recent excesses of the dirty dozen. Sometimes, even in U.S. politics, informed votes remain immune to campaign finance.
First, roll back the federal safety net- deposit insurance and the Federal Reserve’s discount window – to apply only to traditional commercial banks. Exclude all non-bank affiliates of bank holding companies, and the parent companies themselves from the safety net.
Second, require all customers, creditors and counter-parties of all non bank affiliates to sign a legally-binding document accepting that there will be no government guarantee, ever, protecting their investments. A similar disclosure would also apply to bank deposits outside the FDIC insurance limit.
Third, restructure the largest financial holding companies so that every one of their corporate entities is subject to a speedy bankruptcy process and, in the case of banking entities themselves, that they must always be of a size that is too small to save. The aim must be, for every bank across the United States, that should it fail, it will be liquidated with finality – closed on Friday and reopened the following Monday under new ownership and new management.
Hat Tip: Richard W. Fisher and Harvey Rosemblum, ‘Hot to Shrink the ‘Too-Big-to-Fail’ Banks’, The Wall Street Journal, March 11, 2013