Real Banking Reform
by P.J. DiNuzzo May 28, 2013
Real Banking Reform
Banks seem to be hogging the lion's share of the profits in the American economy--the banking sector rakes in almost a third of the total profits earned by all corporations, and the four biggest banks have nearly 40% of all deposits. The total assets of the six largest U.S. banks have grown from about 16% of U.S. GDP to 65% today.
These largest lending institutions have grown so large using an unfair advantage in the marketplace. Because it is widely perceived that the government will bail them out no matter what incredibly stupid thing their leaders might do, lenders are willing to let them borrow at lower rates than you or I could. (What are the chances that the government will bail either of us out if we encounter financial hardship?)
The Bloomberg organization has calculated that the "too big to fail" doctrine effectively gives $83 billion a year of taxpayer subsidies to the ten largest U.S. banks; $64 billion to the five largest.
Even politicians seem to agree that this is unfair. In a rare display of bipartisanship in Congress, Ohio Democratic Senator Sherrod Brown and David Vitter, a Republican Senator from Louisiana, have introduced a bill that would eliminate these government subsidies that put taxpayers at risk for large bank defaults. What are its chances for passage? When the duo crafted a resolution calling for essentially the same provisions that are written into the bill, it passed 99-0 in the Senate.
The bill calls for measures that are so simple, you wonder why nobody has proposed them before. First, every lending institution with more than $500 billion in assets would have to hold at least 15% of its assets in liquid capital. This would end the highly-leveraged bets that institutions made leading up to 2008, that were orders of magnitude more than the money they actually had on hand. Banks would still be able to create tricky off-balance-sheet assets and liabilities, but under the new proposal, those would be treated as if they were on the balance sheet for purposes of the capital requirements.
Finally, and perhaps most importantly, derivative positions--complex bets on everything from the solvency of individual investments to directions in interest rates--would be treated as if they are on the balance sheet, and would have to be disclosed and counted toward that net capital requirement.
Of course, the largest U.S. banks--JPMorgan, Chase, Citigroup, Goldman Sachs, Morgan Stanley, Bank of America and Wells Fargo--are all vehemently opposed to these new provisions, and are denouncing the bipartisan bill through their hired lobbyists and legal firms. One pundit has cynically suggested that the volume of their lamentations will most likely be in direct proportion to the hourly rate they bill their clients. But these will be lonely voices in a debate whose conclusion seems kind of obvious. Vitter has remarked on the Senate floor that "Just about the only people who will not benefit from reining in the megabanks are a few Wall Street executives."
P.J. DiNuzzo, CPA, PFS®, MSTx, MBA
President, Founder, and Chief Investment Officer