'Too Big to Fail' a Myth? What a Relief

What a relief it was to read that the "too big to fail" problem — in which the nation's largest financial institutions benefit from government support because of the risks they pose — does not exist!

While I and other community bankers distinctly remember that the Wall Street financial crisis of 2008 caused the past five years of economic turmoil and trillions of dollars in government assistance, it was a great pleasure to learn that no significant restructuring of the firms that caused the meltdown is needed whatsoever. But it sounds like Wall Street should continue spreading this message, because apparently some other folks, including the Justice Department, are confused as well.

First of all, it was good to read that, even if a "too big to fail" financial firm did exist, its failure would not lead to a systemic crisis. I just hope Washington policymakers caught that, because I believe the leading assumption about the "too big to fail" problem is that these institutions would not be allowed to fail in the first place. But since their failure would not devastate the financial markets, regulators are free to go about dismantling the megabanks after they fail instead of doing so beforehand to prevent systemic risks, which thankfully don't exist. And I guess we can stop worrying about the federal government propping up these large institutions with taxpayer-funded backstops and about the market distortions and moral hazard these bailouts would create — false alarm.

About those market distortions, it was also nice to hear that "too big to fail" firms have no funding advantage over community banks and other small financial institutions. Apparently we can forget the Federal Deposit Insurance Corp. data showing the megabanks have both the lowest credit quality and the lowest cost of funds in the banking industry and that, while smaller community banks have the best credit quality, they somehow also have the highest cost of funds.

Someone needs to tell all this to Moody's Investors Services, which last year said their credit downgrades of the largest financial firms would have been even more substantial if these institutions did not enjoy full government backing. Moody's, you can resume the downgrades.

Meanwhile, the absence of a "too big to fail" problem means the Federal Reserve can take it easy on its policy of maintaining ultra-low interest rates to subsidize the megabanks, which make money on volume and transaction fees. The central bank can begin normalizing interest rates and stop penalizing the community banks that stay in business based on how they price their deposits and loans. The Fed no longer needs to focus so much on decreasing the cost of capital to the megabanks while minimizing returns for smaller institutions. Chairman Bernanke, call me.

And last, but certainly not least, I was thankful for my own reminder that the regulatory burdens that have weighed down the community banking industry should be a top policy priority. It's true: The regulatory response to the Wall Street crisis has affected all banks, including the Main Street institutions that did not contribute to the mess but have nevertheless been charged with cleaning it up. It's time for us to focus our energies solely on relieving these burdens and completely forget that the megabanks whose unscrupulous behavior drove the economy into the ground were the ones who triggered the massive regulatory response.

After all, these institutions are not "too big to fail", that much we know. I, for one, am glad we cleared that up. But Wall Street is going to have to keep communicating its message to make it abundantly clear that the "too-big-to-fail" problem is behind us.

Just one word of warning to Wall Street: Don't tell the Justice Department.

For those who missed it, U.S. Attorney General Eric Holder, in a moment of refreshing candor told the Senate Judiciary Committee he was concerned "the size of some of these [financial] institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute – if we do bring a criminal charge – it will have a negative impact on the national economy, perhaps even the world economy."

So on second thought, Wall Street, the end of "too big to fail" might be one secret you should keep to yourselves.

Camden R. Fine is president and CEO of the Independent Community Bankers of America.