Frank Keating, the president and CEO of the American Bankers Association and former two-term governor of Oklahoma, writes this letter to the editor in response to James Pethokoukis's recent WEEKLY STANDARD article "Too Big for Comfort."
While we appreciate Mr. Pethokoukis’s acknowledgement that banks serve a critical role, his support for breaking up our nation’s largest financial institutions is severely misguided. Such an action would be counterproductive to our still-recovering economy and would quickly drive large corporations to foreign competitors and the largely unregulated “shadow” banking system, which was ground zero for the 2008 financial crisis.
Let’s take a look at the facts. ABA has always believed that no bank – or company – should be too big to fail. None of the top five banks in the world are based in the U.S. – in fact, our country only has one in the top 10. Reducing the size of America’s largest financial institutions would severely diminish their capacity to serve our country’s largest businesses. And while small and regional banks remain the backbone of their communities, these institutions are in no position to finance the needs of our nation’s largest corporations.
But it’s not all about financing. Major corporations often require an intricate menu of financial services – from cash management to hedging - that only our largest institutions are equipped to offer. If the U.S. banking industry can’t meet their needs, there are a number of countries that are ready – and willing – to step up to the plate.
The U.S. financial marketplace has evolved over time to meet the demand for these types of sophisticated services, which are essential for large corporations running global businesses. History teaches us that implementing artificial barriers serves only to breed inefficiency, misallocate resources and cause unintended consequences that harm bank customers. Arbitrarily splitting banks into several smaller parts will just make serving businesses more difficult and drive up costs.
The underlying problem with too-big-to-fail is that parties with money at risk are protected by the government. The solution, therefore, is to assure that equity owners take losses in any bank failure. No one pretends the process to assure this will be easy, but the Dodd-Frank Act set the ball in motion and the FDIC recently unveiled a detailed strategy for resolving large institutions. These important steps toward ending “too big to fail” emphasize private sector responsibility while ensuring shareholders understand their principal is at risk – and they will not receive any taxpayer assistance in the event of a failure. Breaking up banks doesn’t deal with this fundamental problem at all, but surely would create many more difficulties in the meantime.
We should carefully consider what’s at stake before supporting proposals that would harm the U.S. economy. The top 10 U.S. banks today employ 1.1 million people, routinely delivering innovations that make managing money safer and more convenient and providing critical services to U.S.-based multinational companies that in turn employ millions.
Assuming the worst and launching a preemptive strike that would cripple America’s competitive advantage is not the solution. Stringent “if you fail, you lose” policies will assure the market doesn’t assume the best in a worst-case scenario. Let the FDIC’s resolution strategy work if need be and allow America’s large institutions to serve corporations here at home.
Mr. Keating seems to think there is some economic value created by mega-banks whose existence is a result of government decisions rather than market forces. But he offers no proof. Academics can surely find none. Finding the costs, however, is quite easy, as anyone living through the Great Recession can attest. It is the not the "barriers" that are artificial but rather the supersizing of these financial institutions.
Mr. Keating may also being the only person in Washington not named Dodd or Frank who believes the Dodd-Frank law ends too big to fail -- certainly neither investors not the ratings agencies do -- or in event that a large institution gets in trouble that panicky politicians -- being advised by current or former employees of large banks -- won't once again bail it out.
And while I realize that big banks create many high-wage jobs, the market distortions created by too big to fail give me no confidence that the talents of these employees are being put to their most economically valuable use.
Finally, Mr. Keating seems oblivious to the risk of concentrated economic power marrying itself to concentrated political power. Big Money joining with Big Government to create of two-way rent seeking that benefits both but not the rest of America.