The Economist: Resurgence of Big American Banks May Not Be Ideal for US

Tuesday, 14 May 2013 07:49 AM

By John Morgan

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American investment banks are back — they are once again leading global finance, but that may not be necessarily good for American taxpayers, according to The Economist.

It is "not obvious" that Europe benefits from having national banks that are adroit at profitably packaging U.S. subprime loans, The Economist said. In fact, that European banks have done more poorly than U.S. ones have is not an endorsement of the American model.

"Indeed, it is American taxpayers and investors who should worry about the dominance of a few Wall Street firms. They bear the main risk of future bailouts."

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Many Americans would benefit from greater competition in investment banking, The Economist said, adding that the higher cost of taking companies public in the U.S. is not a favorable development.

"IPO fees are much higher in America than elsewhere (7 percent versus 4 percent), mainly because the market is dominated by a few big investment bank," the magazine stated.

"Increasing the capital surcharges for big banks would do more for the stability of the financial system than the thicket of Dodd-Frank rules ever will," The Economist asserted, referring to the federal legislation aimed at reforming the U.S. banking system in the wake of the 2008 financial crisis.

The share of the international investment banking market held by European banks has dropped by 20 percent since the crisis. Meanwhile, JPMorgan Chase, Goldman Sachs and Citigroup now account for about one-third of global investment banking revenues.

European regulators have contributed to their banks' decline in some ways, but forcing them to hold more capital is sensible, and separating their retail deposits from their wholesale businesses is a sound practice, The Economist said.

"Switzerland and Britain are making progress in ending the implicit taxpayer subsidy that supports banks that are too big to fail. The collapse of Ireland's economy is warning enough of what happens when governments feel compelled to bail out banks that dwarf their economies."

In a weekend opinion piece, Robert Samuelson, an economics columnist for The Washington Post, wrote that while it has been five years since the financial meltdown, "we still don't know whether the [U.S.] financial system is safe."

Samuelson noted the Federal Reserve cites significant progress in righting the nation's financial ship — the 18 largest bank holding companies doubled their equity capital from $393 billion in late 2008 to $792 billion at the end of 2012.

But, he said, the jury is still out whether Dodd-Frank will be effective in the next crisis, as the federal rules and regulations brought by the bill may be a hindrance to growth, and the legislation's restrictions on the Fed's lending authority may prevent its quick response in a fresh financial emergency.

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