The systemic threat posed by megabanks

By Felix Salmon
August 31, 2009
David Cho's piece (and graphical sidebar) on how the too-big-to-fail banks are growing, both in size and profitability, at the expense of small-enough-to-fail institutions:

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Just a gentle reminder, if you haven’t got around to it yet, that you really have to read David Cho’s piece (and graphical sidebar) on how the too-big-to-fail banks are growing, both in size and profitability, at the expense of small-enough-to-fail institutions:

J.P. Morgan Chase, an amalgam of some of Wall Street’s most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show…

In the last quarter, the top four banks raised fees related to deposits by an average of 8 percent, according to research from the Federal Reserve Bank of Dallas. Striving to stay competitive, smaller banks lowered their fees by an average of 12 percent…

Large banks with more than $100 billion in assets are borrowing at interest rates 0.34 percentage points lower than the rest of the industry. Back in 2007, that advantage was only 0.08 percentage points, according to the FDIC. Such differences can cause huge variance in borrowing costs given the massive amount of money that flows through banks.

It’s urgent that the government (probably through the FDIC) start imposing a surcharge on bank size. If this state of affairs is allowed to continue, there will be hundreds of unnecessary bank failures — maybe there already have been. And rather than the big banks getting smaller — which is what makes sense, from the point of view of the amount of systemic damage they can cause — they will continue to get bigger.

It wasn’t all that long ago that the 10% cap on national deposits was taken seriously: now it has been left far behind, even as the total deposit base has increased substantially. Wells Fargo, JP Morgan Chase, and Bank of America pose a real systemic threat to the US economy. They should be forced to start shrinking today.

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