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Still too big to fail

from David Ruccio

Here we are in 2016, almost eight years after the financial crash that brought the world economy to it knees (and ruined countless homeowners and threw millions of people out of work), and nothing has been done to solve the problem of Too Big to Fail banks.

Concentration-chart-610x367

In fact, as everyone knows (and as Stephanie Fontana points out), those banks are now ever bigger and the financial sector even more concentrated.  

A small number of massive banks dominate this powerful industry with the five largest banks collectively holding $6.9 trillion in assets – 44 percent of total U.S. bank assets as of the end of September.

So, where are we in the current debate? One major-party candidate (Donald Trump) simply wants to scrap the existing reforms to the financial sector (contained in Dodd-Frank). Another (Hillary Clinton) wants just to enforce the minor changes contained in the new regulations. Only the third candidate (Bernie Sanders) suggests we deal with the problem by breaking up Too Big to Fail banks and bringing back something like the Glass-Steagall Act.

Here’s the irony: the folks who run one of the bankers’ banks, the Federal Bank of Minneapolis, recognize that the existence of Too Big to Fail banks continues to be a problem. And conservative University of Chicago finance economist Luigi Zingales, in his talk at the Minneapolis conference, argues that Too Big to Fail banks have too much power, both economically and politically; the so-called Volcker Rule has been captured and rendered useless; and, belatedly, he’s become convinced that something like Glass-Steagall needs to be implemented.

I’m not arguing that breaking up the banks and implementing Glass-Steagall is enough. But shouldn’t that be the starting point for our current debate?

  1. C-R D
    May 23, 2016 at 5:17 pm

    A careful rerurn to the Glass-Steagall Act is what I recommended to President Obama in a private memoir dated 9/22/2008.

  2. May 23, 2016 at 10:44 pm

    Why is the concentration of the sector the main concern, or why is five over-leveraged and collectively fragile banks worse than 200 over-leveraged and collectively fragile banks? The collection of 200 banks may be even more fragile, if anything, and harder to clean up if they fail systemically.

    The point of smaller banks is they can be wound down individually and insured individually against random mishaps. Also to reduce individual bank leverage. But if the sector is systemically unstable (as it was in the GFC) or the sector has too much lobbying power, then breaking “TBTF” banks may be irrelevant.

  3. louisperetzperetz
    May 24, 2016 at 8:13 am

    The Glass-Steagle Act is not a realistic way today to separate flows of currencies. My thecnical opinion is that It will be possible only if you give a different name to the borrowed one from the ordinary currency one. That means two national moneys running inside a country. The regulation will be done by computers of a special customer service bank. I prove it in my book;

    • May 27, 2016 at 7:07 am

      That is interesting. Could you please give me book title? best regards, Jacek

  4. David Chester
    May 24, 2016 at 9:08 am

    Not only has nothing been done, but nothing has been found for the reason why it will not happen again. And it will!

    A proper study of our social system has provided the answer to both these implied questions. Henry George explained it 135 years ago (Progress and Poverty” 1879, Schlanbach Foundation, still in print) but up to today a very small number of people in charge of national progress have taken him seriously. The cycle occurs ever 18 years so look out for 2026, unless of course the tax policy follows George’s big idea.

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