Breaking Up The Too Big to Fails Will NOT Harm America's Ability to Compete with Foreign Banks

George Washington's picture

Washington's Blog.

I have previously debunked numerous false arguments used to defend the too big to fails. See this and this.

the apologists for the TBTFs are now arguing that breaking up the
beached whales ... er, giant banks ... will harm America's ability to
compete with foreign banks.

Joshua Rosner (managing director of an independent financial services research firm), has written an important essay debunking this argument:

who argue against a more proactive reduction in risk and size of TBTF
institutions will, as always, revert to an argument that strikes a
natural chord in every American’s heart: ‘Doing so would create an
unleveled international playing field for our institutions relative to
their international competitors’. Level playing fields are a worthy
goal, but this is not a relevant argument. Instead, this tired bromide
must be resoundingly dismissed on several counts:

  • Those
    countries with the largest banks as a percentage of GDP (Iceland,
    Ireland, Switzerland) demonstrated that a concentration of banking
    power can cause significant sovereign risk and tilt global economic
    playing fields away from that country.
  • The likely
    breakups of ING, Lloyds and KBC suggest that it is we who seek to
    support an unlevel playing field where we subsidize our TBTF banks
    while other nations recognize the policy failures of moral hazard. If
    we continue down this path we will likely be at risk of violating
    international fair trade regimes.
  • When the “unlevel
    playing field” argument is cited, keep in mind this reasoning supports
    the disadvantaging of 8000+ community banks relative to our largest
    banks, all in the name of protecting big banks from governmentally-
    subsidized international competition.
  • There is no
    longer any evidence that, beyond a cost of capital advantage that comes
    with implied government support, there are sustainable and tangible
    economies of scale arising from being the largest. The financial
    supermarket concept has been proven a failure. The only ones who
    benefit are the high-level executives.
  • We must demand
    that our legislators no longer allow unelected officials at the
    independent Federal Reserve to sign international accords created by
    the TBTF banks through supra-national bodies like the Basel Committee.
  • Are
    we to believe that if we did not have such large and globally dominant
    firms, US borrowers might be paying more that the 29% interest that
    several of the TBTF firms are now charging on their card accounts?
    Perhaps we should think about what advantage our population has gained
    as a result of our financial institutions being such a large part of
    our economy or being globally dominant.
  • Since when did
    we accept a national strategy of following rather than leading? When we
    do what is right, others follow. As example, consider the bank secrecy
    havens – they made money for a bit. Now, even the Swiss and the Cayman
    authorities are coming around to our view.
  • We are
    already at a disadvantage given that the largest foreign banks operate
    in the US without any tier one capital requirement and yet mostlarge
    foreign banks have not built a bricks and mortar presence here. Nobody
    screams about their undercapitalization nor has that
    undercapitalization caused deposits to migrate to foreign banks.

What fake excuse will the apologists for the TBTFs throw out next?

breaking up the giants and letting small and mid-sized banks, credit
unions and state public banks compete fairly will shift the Earth's
gravitational field as deposits shift away from the money centers?

Rosner has a funny and potentially effective idea for putting pressure
on Congress. He suggests that we all call our representatives and ask how much the lobbyists have paid them to destroy America's economy by propping up the too big to fail banks.

Rosner's actual language is somewhat over-the-top:

leadership won’t add such language [reigning in the TBTFs], call your
elected official and ask how much they actually receive when they agree
to put on the kneepads.

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aus_punter's picture

I broadly agree with this post except that the banks you describe, Lloyds, KBC and ING never really competed with anyone in the banking space anyway, so breaking those institutions up is an irrelevance. These institutions only real purpose has been to lend money and become a dumping ground for structured finance products.

The larger of the European banks are still so woefully undercapitalised and will soon be bowing to the pressure of their state shareholders to concentrate on local business to maximise domestic lending and employment that they will prove harder to beat in their home markets.....regardless of their zombie status. 

The TBTF's in the US will inevitably be competing for a smaller pie and regardless of their efforts to the contrary will be locked in a war of attrition competing for less and less business. 

Miles Kendig's picture

In essence, what we have here folks is a characterization of the banks and the government that has assumed the risk profile of these banks as some sort of 1,000 pound men, unable to move without assistance.  They have suckered everyone else into the idea that if anything is done to move these overweight, unhealthy "persons" to health they will have a heart attack and kill us all since they sit upon the crossroads of commerce and have sold most folks the idea that they are the heart of the nation and indeed the world.   Given these "objective" circumstance the government is not only beholden to the 1,000 pound persons, but is one of them itself, will do everything to make the rest of us carry them so as to save them the indignity of actually addressing their morbid obesity and the cycle of codependency that enables them all to remain so fat.

Miles Kendig's picture

GW - WOW.  As ZH's resident autodidact I am inspired that my observations resonate with you and yours.

All The Best.

Miles Kendig's picture

True enough.  My step father is a trained economist who spent a portion of his career at the FHLB.  We have had some excellent converstaions.  Sometimes it helps to apply some free association and street sense to an academic conversation..

Speaking of which.. The movie visualization I would use is actually an overweight woman.. From the movie Spun.  Trailer park mama...

Thanks for your excellent flow of considered opinion.  You have made your spot one of my stops.

All The Best

Anonymous's picture

Ok....Let's simplify this....

Here it is....

Bad debt has to be destoyed before the economy
can move forward.....

As long as massive bad debt is carried....moving forward
cannot happen....


Here's one more hint....

I + D = V

I ncome
D ebt
V aluation

All current and proposed policies lower V....

All of them....

If direction moves to the positive will
not be real until D is destroyed by realization.....
and the major change that could turn V aroung is
tax structure change....

None of which is in the planning phase of the current polys....

The Harvard Queens are tanking the US.....similar
to the Harvard Fianaces.....

Sort of like the know....a nasty financial virus....