Commentary Magazine


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Too Many Too-Big-to-Fail Banks

I was at a banking conference in Dallas over the weekend, and among the speakers was Harvey Rosenblum, the vice president and director of research at the Dallas Federal Reserve Bank. Dr. Rosenblum’s topic was too-big-to-fail banks and the Dodd-Frank legislation that is supposed to cure the problem.

There are currently 5,582 banks in the United States. That is a very great many by the standards of the rest of the world, but it’s way down from the peak number of banks, which was over 30,000 in 1920. But the total number doesn’t begin to tell the whole story. Of the total, 5,500 banks are so-called community banks, with banking assets of under $10 billion. Then there are 70 mid-size banks, with assets of between $10 billion and $250 billion. Finally, there are 12 megabanks with assets between $250 billion and $2.3 trillion.

What’s scary is that the community banks, 98.5 percent of all American banks, have only 12 percent of the banking assets. But the megabanks, only .21 percent of all banks, have 69 percent of all banking assets.

These are the too-big-to-fail banks. Their failure would ripple throughout the economy and could well cause a financial contagion that would be hard to stop. And Dodd-Frank doesn’t do a thing to solve that problem. Dodd-Frank is 893 pages of legislation and, so far, 9,000 pages of regulation (with 2/3 of regulations yet to come). Regulations, of course, don’t stop bank failure. They don’t stop the moral hazard created by a bank being too big to fail. They don’t stop the competitive advantage that being too big to fail gives the megabanks, with other institutions willing to lend to them at lower rates, knowing that the government will have no choice but to rescue them from failure.

What massive new regulation does do is give the megabanks yet another advantage because they can absorb the costs of new regulation much better than the small community banks. That, of course, is why the megabanks didn’t lobby against Dodd-Frank. So this is classic crony capitalism, Washington and the big guys ganging up on the small guys in the name of protecting the people.

It also almost guarantees another banking crisis in the future.