Why BofA needs to shrink

By Felix Salmon
January 5, 2010
Brian Moynihan's first speech as CEO of Bank of America was a big one -- and, judging by the sometimes-clumsy writing, he wrote it himself. He certainly seems pretty contrite about what happened:

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Brian Moynihan’s first speech as CEO of Bank of America was a big one — and, judging by the sometimes-clumsy writing, he wrote it himself. He certainly seems pretty contrite about what happened:

The surge of growth in the financial services industry over the past decade obviously went way too far. The broad industry over-lent, and consumers and companies over-borrowed, and we all overleveraged as we believed the risks of the new products could be managed effectively. This led to our recent economic crisis.

Moynihan does not, however, draw the obvious conclusion. If the surge of growth in financial services went way too far, and given that Bank of America was one of the largest and fastest-growing financial-services groups in the country, doesn’t it follow that BofA should get a lot smaller? Moynihan hints a couple of times that it might, but ultimately can’t bring himself to go there:

We will see changes in three primary areas: Consumer issues, including pricing and access to credit… capital markets… and the structure of the industry, including the idea of companies that are “too big to fail.”…

The third area of reform is the structure of the industry. The issues here are the idea of “too big to fail,” leverage and capital requirements, proprietary trading and related activities and taxpayer support…

The key lesson here is “never again.” We can never again get our company or our industry in this position. This will require more capital and more liquidity for all participants, which we support.

We are more concerned with the view that somehow the integration of capital markets and commercial banking is a flawed structure for companies in our industry. It is not. It represents what our customers need from us as an industry.

It’s far from obvious what Moynihan thinks about the issue of too-big-to-fail banks. If the lesson is “never again” then doesn’t that require smaller banks? After all, giants will always fall eventually, no matter what their customers need. But no: Moynihan is perfectly happy with Bank of America’s enormous size.

At Bank of America, we are out in the marketplace every day, making every good loan we can. It is how we build relationships…it is how we make money… it’s the most important thing we can do to help boost the economy. And, it is simply how we serve our customers. Overall, over the past four reported quarters, we have extended three quarters of a trillion dollars in credit.

As I’ve said before, that number is nothing to be proud of: it’s a single number which encapsulates the moral hazard of too-big-to-fail. But Moynihan goes on to make matters worse by underlining how little of that money actually went to small and medium-sized enterprises, the real engine of job creation in the US:

Just last month, we announced that we will increase our lending nationwide to small and medium-size businesses by $5 billion – an increase over 2009 production levels of about 40%.

By my calculations, that means BofA lent just $12.5 billion to small and medium-size businesses in 2009: that’s just 1.6% of its total lending. This is the benefit we get from having a monster too-big-to-fail bank with a balance sheet of $2.25 trillion? A promise to increase lending to small business by a whopping $0.005 trillion? Sorry, but that’s no way to justify the existence of a bank the size of BofA. It should be cut down to size soon, and if Moynihan won’t do that, the government should force his hand.


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I don’t care if we have banks that are too big to fail, as long as they are too smart and too over-capitalized to fail. Since we can’t depend on banks to act in their own self-interest (because the interests of the management and the firms do not always align, like when compensation has no correlation with performance), we need to put restrictions on their operations, like increasing capital ratios with total assets.

Posted by OnTheTimes | Report as abusive

I think that you last point highlights another relevant issue: small business lending just can’t make up enough volume to matter to a bank this huge. It’s a problem in other sectors of financial services as well, notably VC and PE, where if a deal is so small as to have a negligible impact on the bottom line–even if it has a positive NPV–it’s not worth the time and effort involved with pushing the deal across the finish line. Smaller banks would be more likely to lend to small businesses because the loan would have a greater impact on the balance sheet.

Posted by MitchW | Report as abusive

This is probably the Wal-mart effect extended to banking. Small business loans (note that the Google chart doesn’t really address business lending) are the creatures of local lenders, with local markets and local economies as their primary concern.

The loss of these local institutions via bank consolidation has had all sorts of deleterious effects – on community leadership, in local entepreneurship, local charitable efforts, etc. And US law and regulation have facilitated this terrible trend.

Posted by Dollared | Report as abusive

I don’t know why politicians and CEOs waste so much time talking about too-big-to-fail when we have plenty to deal with in terms of consumer protection (from any size institution) and safety and soundness (at any size institution). Actually, I do know why – it’s much easier to get the average voter/reader to pay attention with a four word phrase containing no word longer than four letters than complex regulatory issues. You can have a lousy banking system with big banks. You can have a lousy banking system with small banks. The miracle of America is that we have managed to achieve both.

Dollared: Do you know how many banks there are in the U.S.? Not counting non-FDIC-insured institutions that do banking, over eight thousand.


So please explain in more detail how consolidation has destroyed local lenders. I’d be very interested to hear all about how America requires more than 8,000 different banks, or how consumers who have chosen to bank with a large national bank should be legally mandated to switch their accounts to a smaller local bank in order to support your small business lending goals.

Posted by najdorf | Report as abusive