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The largest and most powerful arm of the central bank of the U.S. has finally admitted the megabank emperors have no clothes. It is past time that we as a nation get to the bottom of this dangerous threat and fix it
April 3 -
Banks are likely to protest new Basel rules that would require them to hold more capital against their exposure to central counterparties, but the standard is necessary to prevent the fast-growing counterparties from becoming "too big to fail."
April 10 -
Regulators should demand more derivatives disclosures in forthcoming living wills. Having banks disclose the risk factors in their risk measurement models would help regulators understand if banks are well capitalized for unexpected losses.
March 12 -
An obscure bill in the House would go a long way to protect taxpayers by giving megabanks an incentive to deleverage and shrink. So why has it gone nowhere?
March 27
In a
The NYFRB study relied on outdated data from a 20-year period ending in 2009, at the height of the financial crisis: a period of explicit government support for the industry and prior to the passage of the Dodd-Frank Act. Since then, Dodd-Frank, a host of regulatory initiatives and industry-initiated reforms has transformed market conditions for firms large and small. Crisis-era and pre-Dodd Frank data is about as relevant to what's going on in today's financial markets as teletype.
Even as he relied on outdated data, NYFRB researcher João Santos found only a small cost of funding advantage for large banks. He
For similar reasons, Wal-Mart and Apple can borrow more cheaply than neighborhood retailers or tech startups. Investors do not assume that Wal-Mart or Apple will be rescued if they fail. For investors to see large, diversified banks as a safer bet is not unreasonable. During the financial crisis, 70% of the banks that relied on the
The International Monetary Fund recently examined funding advantages using more recent data 2011 and 2012 and found that any market advantages provided to the large banks at the height of the financial crisis have declined sharply to close to zero only 15 basis points.
Recent research from Oliver Wyman found that any advantage was "statistically insignificant (i.e. it cannot be confidently distinguished from zero)." These findings are consistent with credit analysts, who have been removing large U.S. banks' ratings "uplift" because they do not see an expectation of any future taxpayer bailout, believing instead that bank creditors will suffer losses if a firm gets into trouble in a future crisis.
This progress towards ending "too big to fail" in the U.S. is especially encouraging, because as the IMF data makes clear, we are well ahead of other international jurisdictions in our reform efforts. In parts of Europe, the recent sovereign debt crisis has left many bond investors with the impression that national authorities still stand behind their financial institutions. To put this in perspective, the implied borrowing advantage for some large European banks is six times the size of the advantage for U.S. banks nearly 90 basis points. That number stands in stark contrast to the U.S. and is consistent with the expectation of future government support still seen in the Eurozone.
Both the IMF and the NYFRB studies recommend that authorities around the world move to complete the existing reforms, especially cross-border resolution planning and capital requirements. However, they also warn against capping bank size or curtailing bank activities, which would have significant negative consequences for liquidity and the efficiency our economy. While our international counterparts are still working through these challenges, many of these reforms have already taken place or are underway here in the U.S.
The facts make clear that, in the U.S., the era of "too big to fail" is fading into the rearview mirror. For the U.S. economy to work its best, we need a vibrant and diverse banking sector that includes large global banks, regional banks and community banks. Banks today are safer, sounder, more secure, transparent, accountable and performing their critical roles in the global economy. Rather than picking winners and losers, we need to support a system that works for everyone.
Rob Nichols is president and CEO of the Financial Services Forum.
