Independent Community Bankers: US Must End Too Big to Fail

Friday, 24 May 2013 12:37 PM

By Michael Kling

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Small banks are battling megabanks over proposals to end "too big to fail" financial institutions.

In the latest salvo, the Independent Community Bankers Association (ICBA) released a report stating the United States must end too big to fail banks.

"As we outline in the report, too big to fail distorts free markets, incentivizes risky behavior, holds taxpayers hostage to bailouts, and creates unfair competitive advantages for the largest banks," said ICBA CEO Camden Fine.

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As the small banks see it, megabanks are the core problem, the problem causing all the other problems in the banking industry.

Actions of megabanks caused the recent recession, the ultra-low interest rates that compress bank margins and the burdensome regulations that large banks take in stride but are unbearable for small banks.

"Taxpayers and community banks are held hostage to the whims of too big to fail firms," the report states.

"The 12 largest U.S. banks, or 0.2 percent of all U.S. banks, hold nearly 70 percent of industry assets, dwarfing the rest of the banking system and representing massive systemic risk," it says. And they enjoy lower borrowing rates because of their perceived government guarantee, a subsidy valued at $83 billion a year.

"The megabanks use the subsidy to unfairly compete, profit and grow even larger, exacerbating industry consolidation."

The ICBA is backing the Brown-Vitter bill that requires the largest banks to hold more capital. The requirement, it says, would mean they could absorb more losses and would avoid a government bailout.

Opposing Brown-Vitter, megabanks and their Wall Street allies say large banks have record capital levels and that the bill would reduce lending. That's not true, the ICBA argues.

Even if the six largest banks were divided into 20 banks, lending would be redistributed among the new banks, but overall lending would be decrease, ICBA argues. "In fact, the additional competition and innovation would likely result in more lending, more jobs and economic growth," the report states.

"By taking bold steps to end too big to fail, the United States would be acting as a leader in global banking reform, and the increased safety and transparency of our banking system would make our banks more competitive globally, not less."

The law firm Davis Polk & Wardwell says the Brown-Vitter bill makes "erroneous assumptions and assertions."

"The problem is the bill would end up hurting banks of all sizes and could inflict serious harm to the U.S. economy," the firm says in its analysis of the bill.

Its leverage ratio fails to distinguish between risky and non-risky assets, as the minimum levels "have not rational basis," and the bill ignores recent large increases in banks' common equity levels and new tools like the orderly liquidation authority.

Plus, there's no proof large banks enjoy a funding advantage because of market perceptions, the firm says.

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