MacroScope

Bernanke on Sen. Warren and too big to fail banks: ‘I agree with her 100 percent’

I asked Fed Chairman Ben Bernanke during his quarterly press conference this week if the central bank had its own estimate for the implicit subsidy that banks considered too big to fail receive in the form of cheaper borrowing. Senator Elizabeth Warren had confronted him at a recent hearing with a Bloomberg estimate of $83 billion which itself was derived from an IMF study. At the time, he dismissed her concern: “That’s one study Senator, you don’t know if that’s an accurate number.”

At the press briefing, Bernanke said the Fed does not have its own figures for Wall Street’s too-big-to-fail subsidy, in part because there were too many factors that made it difficult to calculate.

However, this time around, he seemed more sympathetic to Warren’s concerns than he had at the Senate Banking Committee hearing.

I certainly never meant to say to Senator Warren – and I share her concern about too big to fail, I think it’s a major issue – I never meant to imply that the problem was solved and gone. It is not solved and gone; it’s still here, but there’s a lot of work in train.

We’re putting in the Basel capital standards. We’re putting in the orderly liquidation authority from Dodd-Frank. We’re working with our international partners. And I hope that we’ll make progress against too big to fail, because I agree with her 100 percent that it’s a real problem and needs to be addressed if at all possible.

Priceless: The unfathomable cost of too big to fail

Just how big is the benefit that too-big-to-fail banks receive from their implicit taxpayer backing? Federal Reserve Chairman Ben Bernanke debated just that question with Massachusetts senator Elizabeth Warren during a recent hearing of the Senate Banking Committee. Warren cited a Bloomberg study based on estimates from the International Monetary Fund that found the subsidy, in the form of lower borrowing costs, amounts to some $83 billion a year.

Bernanke, who has argued Dodd-Frank financial reforms have made it easier for regulators to shut down troubled institutions, questioned the study’s validity.

“That’s one study Senator, you don’t know if that’s an accurate number.”

NY Fed’s Dudley: “Blunter approach may yet prove necessary” for too-big-to-fail banks

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It was kind of a big deal coming from the Federal Reserve Bank of New York’s influential president William Dudley. The former Goldman Sachs partner and chief economist has offered a fig leaf to those who say the problem of banks considered too-big-to-fail must be dealt with more aggressively. Some regional Fed presidents have advocated breaking up these institutions. But Dudley and other powerful figures at the central bank have maintained recent financial reforms have already laid the groundwork for resolving the issue.

At a gathering of financial executives in New York last week, Dudley said he prefers the existing approach of making it costlier for firms to become big in the first place. Still, he left open the possibility of tackling the mega-bank problem more directly:

Should society tolerate a financial system in which certain financial institutions are deemed to be too big to fail? And, if not, then what should we do about it?

A picture is worth a thousand pages of financial reform

Here’s a snapshot of FDR & Co. in 1933 as they signed Glass-Steagall, which separated the financial sector into safer, deposit-taking commercial banks and risk-taking investment banks – Wall Street.

And here’s a photo of Bill Clinton & Co. repealing Glass-Steagall in 1999, with the passage of the Graham-Leach-Bliley act known as the Financial Services Modernization Act. 

Fed call for cap on bank size sparks fresh debate on too big to fail

Federal Reserve Board Governor Daniel Tarullo’s call for limiting bank size is sparking debate in unexpected places. Keith Hennessey, who ran the National Economic Council under President Bush, was in Chicago late last week for a discussion with Democratic lawmaker Barney Frank. The topic of the panel, sponsored by CME Group Inc., was the housing crisis.

But the most spirited exchange took place after Hennessey said that banks are simply too big to regulate adequately. “I think Tarullo has got a good point,” he said, referring to Tarullo’s argument for the need to cap bank size. Hennessey, as Bush’s economic policy assistant in 2008, was among administration officials that worked to win Congressional approval for the bailout of insurance major AIG, as its failure threatened to plunge the nation’s financial markets, already reeling from the failure of Lehman Brothers, even deeper into crisis.

Lawmakers eventually relented. On Friday, Frank, who co-authored Wall Street reform legislation designed to prevent another bailout of a too-big-to-fail financial institutions, was not about to cede ground this time to Hennessey. “I didn’t ask what Tarullo thinks – are you for breaking up the banks, and if so, to what size, and by what method?”  “Right now I don’t see any better solution than what Tarullo has suggested – yes, a size cap on banks… The alternative is a repeat of the 2008 crisis.” After the panel, Frank said he took issue with the idea, both from a technical perspective – “How do you do it? Do you sell it? Who’s going to buy it? The other banks by definition can’t.” – and because of concern that trimming bank size will hurt the ability of U.S. financial institutions to compete internationally.

Too big to exist? Fed’s regulation czar backs limits on bank size

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Regional Federal Reserve Bank presidents who oppose quantitative easing have made little way in convincing the central bank’s dovish core. Apparently, not so on the cause célèbre of policymakers like Richard Fisher at the Dallas Fed, who have called for too big to fail banks to be broken up.

In a speech this week, Fed board governor and regulation czar Daniel Tarullo stopped short of calling for outright break-ups. But he did take the unprecedented step of backing size limitations on banks that would be linked to overall U.S. economic output.

In his own words:

In these circumstances, however, with the potentially important consequences of such an upper bound and of the need to balance different interests and social goals, it would be most appropriate for Congress to legislate on the subject. If it chooses to do so, there would be merit in its adopting a simpler policy instrument, rather than relying on indirect, incomplete policy measures such as administrative calculation of potentially complex financial stability footprints.

Safe for the 1 percent: FDIC often insures much more than $250,000

That the U.S. Federal Deposit Insurance Corporation (FDIC) insures deposits in people’s bank accounts up to $250,000 is fairly common knowledge. What is less known is that this $250,000 cap is, in many cases, a fiction, because companies and savvy, wealthy depositors can circumvent it, or avoid it altogether.

Two examples of this “the-sky-is-the-limit” insurance are so-called TAG accounts and CDAR accounts. TAG (Transaction Account Guarantee) accounts held about $1.5 trillion as of March 31, according to the FDIC’s latest quarterly banking profile. The accounts pay no interest, so their popularity is derived from their uncapped FDIC insurance which reassures companies who need to keep large amounts of cash at hand to finance inventories and payrolls that their deposits are safe even if something goes wrong at the bank.

The FDIC is funded by the banks it insures. When it closes a bank, it uses money it has already set aside to protect depositors and absorb any losses associated with the failure. TAG accounts were forged in the fire of the 2008 financial crisis by the FDIC, the U.S. Treasury and Federal Reserve Board and unveiled in a joint press conference.

‘Our financial oligarchy’: Louis Brandeis slams too big to fail – in 1913

Chris Reese contributed to this post

In an article entitled “Our financial oligarchy,” published in Harper’s magazine in December 1913, Louis Brandeis, who three years later would be appointed to the Supreme Court, delivered a scathing critique of the banking sector that bears an uncanny resemblance to the charges against Wall Street today.

As the Libor scandal continues to widen, confidence in an already tarnished financial sector has been eroding further, having already taken a beating in the wake of the 2008-2009 financial crisis and the massive Wall Street bailouts that followed. Five years later, banks are still seen as risky as their post-crisis actions not only fail to restore their reputations but actually push them deeper into disrepair.

Against that backdrop, Brandeis’ description of the rapid growth of investment banks and the expansion of their power in ways that make them behave like economically inefficient oligopolies sounds downright prophetic.

Interview: Richmond Fed’s Lacker on Libor, ‘soggy’ growth and the limits of monetary policy

There appears to have been a significant slowdown in the second quarter. In particular we saw the pace of job creation slowed to a pace of 75,000 per month in the second quarter down from 226,000 in the first quarter and there are also concerns about slowing growth globally, beyond Europe but also in the emerging world and China, which was highlighted in the minutes (to the June meeting) this week. So, where do you think we’re headed? Are we just going to remain in a soft kind of pace? Are there upside risks to growth? Are there downside risks to growth?

Growth has definitely softened. The data are unmistakably weaker in the second quarter than we had hoped they would be. I think everyone recognized the first quarter and the end of last year were a little bit stronger than we might be able to sustain in the middle of the year but it’s definitely come in softer than I’d expected.

At the beginning of the year, it seemed as if Europe wouldn’t maybe weaken as much as we thought but lately the weakening from Europe has been coming online. In the U.S., I think we’re in a situation where we’re going to fluctuate from between the level where we are now to a level that’s more like we saw six or eight months ago. We’re going to have soggy patches, we’re going to have stronger spurts. If you look back over the last three years that’s the record you see. I don’t see a reason for that to change markedly.

MIT’s Johnson takes anti-Dimon fight to Fed’s doorstep

Simon Johnson is on a mission. The MIT professor and former IMF economist is trying to push JP Morgan CEO Jamie Dimon to resign his seat on the board of the New York Fed, which regulates his bank. Alternatively, he would like to shame the Federal Reserve into rewriting its code of conduct so that CEOs of banks seen as too big to fail can no longer serve.

Asked about Dimon’s NY Fed seat during testimony this month, Bernanke argued that it was up to Congress to address any perceived conflicts of interest.

But Johnson says the Fed itself should be trying to counter the perception of internal conflicts. He told reporters in a conference call: