Forum Post: A simple plan for banking from an experienced banker (a repost from my facebook)
Posted 13 years ago on Oct. 7, 2011, 11:50 a.m. EST by FormerBanker
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This content is user submitted and not an official statement
Too big to fail = too big
I promised to stay away from Politics for a while, but I am permitting myself this one partially because it is my area of expertise (MBA in Finance) and partly because I thought I might actually have a somewhat unique insider perspective on this one.
When I took my first Banking class in 1986, things were much different. So different in fact that the class is now worthless except from a historical perspective. Back then national banks were not permitted. Sure there was BofA, Wells Fargo and others operating in more than one state, but there were some very strict regulations that allowed "holding companies" to own "separate" banks in every state that happened to have one name. No one was aware of the unfolding Savings & Loan crisis yet, caused in part by unleashing them from State control and an over heated real estate market (sound familiar?). However, the S&Ls were not yet "too big to fail" and that is exactly what we did. We let them fail, protected depositors and sold off their assets to the highest bidder which created tons of opportunities. Not a dime went to the crooks in charge of the S&Ls, many of them went to jail and the only people that saw any benefit from government spending on the subject were the depositors who trusted the banks to keep their money safe.
One of the arguments for making national banks was creating their ability to fund large deals that need our support and the other reason is that, by being large, they would have more capital and be less likely to fail. Now we know that the second reason was a pipe dream that we would pay for, but there is some merit to the first one. A small statewide bank can not fund something like a large mall or a sports stadium because it is too much money and risk for a small bank.
So why not implement a more moderate, yet more effective solution? The banks have proven they are too big and put us all at too much risk. Break them up. Lets go back to 100 smaller banks that compete with each other and really give us choices. If they fail, the depositors are protected and that bank's competitors can feast on their rotting carcass. The managers of the failed bank can either go to jail if they deserve it or be put out in a marketplace where they have to convince companies they are worth hiring. No bail-outs, no tax payer funded bonuses, no job security at our expense.
To address the large funding problem, require every bank to participate in what I will call "mega-banks". The mega-banks would not have any depositors and would only be allowed to get a small amount of financing from each of a large number of small banks. They would only be allowed to fund very large transactions and if they failed, so be it, they would have a minimal impact on their contributing smaller banks.
If you read all of this and you agree please "like" it and repost. As those of you who know me, I never ask anyone to repost anything, but moderates need to start speaking up with ideas that actually work. Spread the word.
In order for this to work, there would have to be rules in place that limit the exposure in the other direction, e.g. the small banks would need to make sure no more than <n> percent of their exposure was locked up in any one deal. It's just another description of diversification, only backed up by regulations. It sure as hell is better that 'too big to fail ...'
Agreed, this was not a comprehensive, detailed solution. Rather, it is meant as more of a recommended direction to agree to in pricipal with the details to be determined as it evolves. However, first step is to get support of the concept that "too big to fail" simply means "too big" and we need to look towards breaking up these mega-corporations that jeopardize our economy.
"like" Just missing 1 essential point: The "mega-banks" should have of a governmental supervisor, so that any problem, before increasing, can be alarmed and solved in an early stage.
The idea is to keep the mega-banks limited in their scope so that they are not too big to fail. If they do fail another mega-bank will buy its assets and loan portfolio. Plus, small banks will be their clients and investing in those they think are the most stable and give the most value.
Support your local community bank because Congress doesn't have the balls to try to break up the BIG BANKS. Depositors will have to do it themselves.
The problem is that small banks can not compete with the resources of a large bank and if they do, they will be quickly purchased by a larger bank. We need legislation to put them on equal footing.
Ideas for this -
Make regulatory burdens and capital requirements increase as market cap increases.
The current regulatory burden fails disproportionally on smaller institutions. In order to address this, regulation could be assessed as a percentage of net income (or some other metric), rather than a nominal amount.
Interesting concept, but from my time in Central Finance of a bank ... I think we would have thought of someway to shift the money into other operating units of the bank to dodge these types of restrictions.
That may not be a bad thing if that money is being shifted into lower-risk operating units.
We need to examine the incentive system; if banks that are too big and assets that are too concentrated are indeed part of the problem (which I posit that they are), then we have to change the incentive structure so that they act differently. This shouldn't be done through force, rather modification of behavior through proper regulation.
We can't let organizations get so big to the point where they pose a systemic risk, but at this point they already hold so much political sway because of their economic success that it may be too late.
Complicated issue, but decreasing the role that money plays in the political process could help strike the problem at the root.
I guess at the root of it, I think that there is always a way around it and people get paid big bucks to figure it out. At some point there has to be a balance between corporations having freedom to operate and grow and the government providing us with protections. The Glass-Steagall act worked very well for decades and I think it is time to go back to a modified version of it. The downside with your plan is if we get it wrong, we are left holding the bag again. I am just not willing to do that. If a bank fails I want 1) my deposit to be protected 2) no one involved in the failure to get richer due to my bail out money 3) if available, I want to have the opportunity to buy their assets at pennies on the dollar AND have those funds being used to offset costs to insure depositors 4) I don't want the guy whose job I just saved to be calling me on the phone asking why my house payment is a week late.
Yes, bring back Glass-Steagall, I totally agree. Also, discard many other frivolous regulations which don't actually achieve anything and just increase the cost of doing business. Tier 1 capital reqs should probably be increased across the board, and maybe scale those up by market cap (IMO, the bigger you get, the more risk you pose to the system, so the more you should be required to "insure" yourself by having higher capital reqs). Also, examine conflicts of interest in the regulatory system, for example, the OCC is one of the organizations that regulates banks, but is also funded by the banks.
I would love to tax businesses on "excess" retained earnings, reinvest it in the economy or distribute it - but that is a different discussion.
I think the same could be said about "excess" reserves. If we are trying to incentivize lending, then why is the Treasury paying banks on the reserves they hold? Especially when that number is 1.6 trillion dollars. Of course, this was supposed to be one of those "temporary" things, and we know how those usually turn out.