ICBA Report: Ending-Too-Big-to-Fail

by Sabrina I. Pacifici on June 22, 2013

“The Independent Community Bankers of America® (ICBA) [on May 22, 2013] released End Too-Big-To-Fail, a report that examines the impact of too-big-to-fail financial institutions on the U.S. economy and why too-big-to-fail must be brought to an end now. In the report, ICBA also highlights the Terminating Bailouts for Taxpayer Fairness Act of 2013 (TBTF Act, S. 798), introduced by Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.), as a valid solution to curb the too-big-to-fail epidemic. The document also addresses common myths and facts about the legislation.

Key highlights from ICBA’s report include:

  • The megabanks have become even larger since the financial meltdown. In fact, 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.
  • Because these firms are too big to fail, they court risks that no smaller firm would tolerate and act with impunity. The markets offer them credit at rates that do not reflect their true risk—rates that are subsidized by an implicit taxpayer guarantee.
  • This too-big-to-fail subsidy, valued at $83 billion annually by two economists with the International Monetary Fund and Bloomberg View, creates a competitive imbalance. The megabanks use the subsidy to unfairly compete, profit and grow even larger, exacerbating industry consolidation.
  • The Justice Department knows they’re too big to fail, as Attorney General Eric Holder recently admitted before the Senate Judiciary Committee. Worries about destabilizing the megabanks mean they are effectively immune from prosecution. When the too-big-to-fail banks are above the law, they’re too big to jail.
  • The banking industry is becoming more concentrated, and the trend will only continue as long as too-big-to-fail exists. The bigger and more complex the megabanks become, the more damage their failure would cause and the more surely they will be bailed out and immune from prosecution. The bigger and more complex they get, the harder they are to manage and the more likely they are to stumble and need another bailout. It’s a vicious circle.
  • There are significant other sources of credit for businesses, including community and regional banks. Community banks already finance more than 55 percent of small-business loans under $1 million and have sufficient capacity to lend more.
  • Even if the six largest banks split themselves into 20 banks due to stricter capital guidelines, lending may well be redistributed among these new banks, but it will not be reduced in the aggregate. In fact, the increased competition and innovation would likely result in more lending, more jobs and greater economic growth.
  • ICBA has endorsed the Terminating Bailouts for Taxpayer Fairness (TBTF) Act (S. 798), introduced by Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.). Brown-Vitter takes a clean approach to the problem—requiring the largest, riskiest banks to hold more leverage equity capital will allow them to operate more safely, absorb more losses and avoid a government or taxpayer bailout. S. 798 can be implemented without complex new rules.
  • 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.”

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