When Internationally-Accepted Accounting Methods Are Used, American Banks Are the World’s Largest
We have extensively documented that failing to break up the big banks is destroying America because
In the face of such overwhelming criticism, apologists for America’s largest banks say that they are smaller than their European and Asian competitors … and that they have to be big to compete.
Current Vice Chair and director of the Federal Deposit Insurance Corporation – and former 20-year President of the Federal Reserve Bank of Kansas City – Thomas Hoenig destroyed
that argument earlier this month.
Specifically, Bloomberg reports
Warning: Banks in the U.S. are bigger than they appear.
That label, like a similar one on automobile side-view mirrors, might be required of the four largest U.S. lenders if Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., has his way. Applying stricter accounting standards
for derivatives and off-balance-sheet assets would make the banks twice as big as they say they are
— or about the size of the U.S. economy — according to data compiled by Bloomberg.
“Derivatives, like loans, carry risk,” Hoenig said in an interview. “To recognize those bets on the balance sheet would give a better picture of the risk exposures that are there.”
U.S. accounting rules allow banks to record a smaller portion of their derivatives than European peers and keep most mortgage-linked bonds off their books
Using international standards
for derivatives and consolidating mortgage securitizations, JPMorgan Chase & Co. (JPM
), Bank of America Corp. and Wells Fargo & Co. would double in assets, while Citigroup Inc. (C
) would jump 60 percent, third- quarter data show. JPMorgan would swell to $4.5 trillion from $2.3 trillion, leapfrogging London-based HSBC Holdings Plc and Deutsche Bank AG, each with about $2.7 trillion.
JPMorgan, Bank of America and Citigroup would become the world’s three largest banks
and Wells Fargo the sixth-biggest. Their combined assets of $14.7 trillion would equal 93 percent of U.S. gross domestic product last year, the data show.
U.S. accounting rules for netting derivatives allow banks to erase about $4 trillion in assets, the data show. The lenders also can remove from their books most mortgages they package into securities, trimming an additional $3 trillion.
Off-balance-sheet assets and derivatives were at the root of the 2008 financial crisis. Mortgage securitizations kept off the books came back to haunt banks forced to repurchase home loans sold to special investment vehicles.
The U.S. Financial Accounting Standards Board and the International Accounting Standards Board pledged a decade ago to converge the two bookkeeping systems. After six years of meetings, they remain divided
. Proposed rules for how much money banks need to set aside for loan losses may make European and U.S. lenders even less comparable.
“Having no uniform standard is challenging for issuers and users,” said John Hitchins, head of U.K. banking and capital markets at PricewaterhouseCoopers in London. “Analysts and investors can’t compare companies’ financials across borders. Banks have to prepare multiple versions of their financial statements in different countries where they have units.”
If the banks used international standards for derivatives and consolidated mortgage securitizations, the ratio for JPMorgan and Bank of America, the two largest U.S. lenders, would fall below 4 percent. It would be just above 4 percent for Citigroup and Wells Fargo.
That would make the biggest U.S. banks look no better capitalized, or worse, than European peers such as HSBC at 5.6 percent or France’s BNP Paribas SA at 3.9 percent at the end of last year. It also could require them to raise more capital. Spokesmen for all four banks declined to comment.
“The U.S. leverage ratio doesn’t capture off-balance-sheet risks,” said [former FDIC boss] Bair, now chairman of the Systemic Risk Council, a private regulatory watchdog. “Once U.S. banks start publishing the new Basel-mandated ratios, more off-balance-sheet assets will become obvious.”
Bair said she favors raising the simple capital ratio as high as 8 percent. Hoenig, the FDIC vice chairman, has called for 10 percent. U.S. regulators are still debating how to implement the rules. Because Basel isn’t an international treaty, each country needs to adopt its own version.
Progress on common standards slowed after Mary Schapiro became SEC chairman in 2009 and faced lobbying by companies opposed to what they said would be costly accounting changes, according to four people with knowledge of the discussions who asked not to be identified because the talks were private.
After failing to agree on common standards for derivatives netting and consolidation of securitizations, rule-setters are now heading in different directions as they debate how to account for loan-loss reserves.
Stunning List of Economists, Financial Experts and Bankers Say We Need to Break Up the Big Banks
The following top economists and financial experts believe that the economy cannot recover unless the big, insolvent banks are broken up in an orderly fashion:
- Current Vice Chair and director of the Federal Deposit Insurance Corporation – and former 20-year President of the Federal Reserve Bank of Kansas City – Thomas Hoenig (and see this)
- Former Federal Reserve Bank of New York economist and Salomon Brothers vice chairman, Henry Kaufman
- Dean and professor of finance and economics at Columbia Business School, and chairman of the Council of Economic Advisers under President George W. Bush, R. Glenn Hubbard
- The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz
- Economics professor and senior regulator during the S & L crisis, William K. Black
- Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales
- The Director of Research at the Federal Reserve Bank of Dallas, Harvey Rosenblum
- Director, Max Planck Institute for Research on Collective Goods, Bonn, and Professor of Economics, University of Bonn, Martin Hellwig
Even current Fed chairman Ben Bernanke
says that the big banks should be downsized
And the head of the New York Federal Reserve Bank – and former Goldman Sachs chief economist – William Dudley
– says that we should not tolerate a financial system in which certain financial institutions are deemed to be too big to fail.
Federal Reserve Board governor Daniel Tarullo
also backs a cap on the size of banks, and Former Treasury secretary under Reagan and George H.W. Bush, Nicolas Brady
, says that we need to put a cap on leverage.
Top Bankers Call for Big Banks to Be Broken Up
While you might assume that bankers themselves don’t want the giant banks to be broken up, many are in fact calling for a break up, including:
- Former managing director of Goldman Sachs – and head of the international analytics group at Bear Stearns in London- Nomi Prins
- Numerous other bankers within the mega-banks (see this, for example)
- Founder and chairman of Signature Bank, Scott Shay
- Former Natwest and Schroders investment banker, Philip Augar
Bipartisan Consensus Formed: We Must Break Up the Giant Banks
- The President of the Independent Community Bankers of America, Camden Fine
Liberal congressman Sherrod Brown and conservative congressman David Vitter are pushing to break up the big banks:
Huffington Post reports
Sen. Sherrod Brown (D-Ohio), along with unlikely ally Sen. David Vitter (R-La.), is launching an effort to break up the taxpayer-funded party on Wall Street.
“The best example is that 18 years ago, the largest six banks’ combined assets were 16 percent of GDP. Today they’re 64-65 percent of GDP,” Brown said. “So the large banks are getting bigger and bigger, partly because of the financial crisis, partly because of the advantages they have.” [Indeed, they're 30% bigger
than they were when the big "financial" reform bill was passed.]
“The system is such that the big banks have far too many advantages, bestowed in part by the marketplace, because investors understand and the market understands that government might in fact bail them out, so there is lower risk for investors, and that means that they can borrow money at a lower cost than anybody else can,” Brown said, explaining why small- and mid-sized banks are at a disadvantage.
Brown and Vitter announced on Thursday that they were working together on bipartisan legislation to address this problem.
“I think the fact that Sen. Brown and I are both here on the floor echoing each other’s concerns, virtually repeating each other’s arguments, is pretty significant
,” Vitter said Thursday in his Senate floor remarks. “I don’t know if we quite define the political spectrum of the United States Senate, but we come pretty darned close. And yet, we absolutely agree about this threat
In his floor remarks, Brown underscored the urgency — and the challenge — in breaking up the biggest banks.
“Just about the only people who will not benefit from reining in the megabanks are a few Wall Street executives,” he said.
Brown’s push received a conservative boost this month from pundit George Will, who wrote that the senator’s efforts deserve support from the right.
“By breaking up the biggest banks, conservatives will not be putting asunder what the free market has joined together,” he wrote. “Government nurtured these behemoths by weaving an improvident safety net and by practicing crony capitalism. Dismantling them would be a blow against government
that has become too big not to fail.”
“When the Will column came out, it was pretty interesting,” said Brown. “People I’ve known over the years who have my email address — I got several emails from people who kind of surprised me that they supported the idea.”
Conservative Wall Street Journal columnist Peggy Noonan has urged Republicans
to break up the big banks, as has former GOP presidential candidate Jon Huntsman
. [So has James Pethokoukis
, a columnist for the American Enterprise Institute, who writes in the pages of the Weekly Standard.]
In 2010, Brown and then-Sen. Ted Kaufman (D-Del.) also offered an amendment to break up the big banks
“I’m not going to mention names, but some who voted [against the 2010 amendment] have come up and said they’re going to vote for it. And we just have a different Senate now from 2010,” he said, adding, “More and more senators have come to me and said they are looking at this differently now.”
Raw Story notes
“Today, our economy is being threatened by multi-trillion dollar financial institutions
,” Brown said on the Senate floor. “Wall Street megabanks that are so large that, should they fail, they would take the rest of the economy with them. Instead of failure, however, taxpayers are likely to be asked to cover their losses, to bail them out as we did five years ago
“This is a disastrous outcome because it transfers wealth from the rest of the economy into these megabanks and it suspends the rules of capitalism
, perpetuating the moral hazard that comes from saving risk-takers from the consequences of their behavior,” the progressive Democrat added.
They are totally correct
And they understand that – while liberals and conservatives might have different starting places – they both reach the same conclusion.
Huffington Post writes:
Brown noted that conservatives and progressives use slightly different arguments and talking points to get to the same conclusion, with conservatives condemning “crony capitalism” and progressives worrying about the corrupting influence of major financial institutions.
We’ve pointed out
Conservatives hate big unfettered government and liberals hate big unchecked corporations, so both hate legislation which encourages the federal government to reward big corporations at the expense of small businesses.
Both liberals and conservatives
are angry that the feds are propping up the giant banks – while letting small banks fail by the hundreds – even though that is horrible for the economy and Main Street
The Dodd-Frank financial legislation wasn’t a compromise where things landed somewhere in the middle between liberal and conservatives ideas. Instead, it enshrines big government propping up the big banks … more or less permanently
Many liberals and conservatives look at the government’s approach to the financial crisis as socialism for the rich and free market capitalism for the little guy. No wonder both liberals and conservatives hate it.
The corrupt, giant banks would never have gotten so big and powerful on their own. In a free market, the leaner banks with sounder business models would be growing
, while the giants who made reckless speculative gambles would have gone bust. See this
It is the Federal Reserve, Treasury and Congress who have repeatedly bailed out the big banks
, ensured they make money at taxpayer expense
, exempted them from standard accounting practices
and the criminal and fraud laws which govern the little guy
, encouraged insane amounts of leverage
, and enabled the too big to fail banks – through “moral hazard” – to become even more reckless
Indeed, the government made them big in the first place. A
As MIT economics professor and former IMF chief economist Simon Johnson points out
… the official White House position is that:
(1) The government created the mega-giants, and they are not the product of free market competition
(3) Giant banks are good for the economy
And given that the 12 Federal Reserve banks are private – see this
- the giant banks have a huge amount of influence on what the Fed does. Indeed, the money-center banks in New York control the New York Fed, the most powerful Fed bank. Indeed, Jamie Dimon – the head of JP Morgan Chase – is a Director of the New York Fed
Any attempt by the left to say that the free market is all bad and the government is all good is naive and counter-productive
And any attempt by the right to say that we should leave the giant banks alone because that’s the free market are wrong
The [corrupt, captured government "regulators"] and the giant banks are part of a single malignant, symbiotic relationship.