Skip to comments.Too Bigger To Fail? St. Louis Fed Warns Over Concentration Of Risk "Big Banks"
Posted on 12/16/2009 10:22:36 AM PST by FromLori
One of the numerous adverse side-effects of the horrendous policy decision to start bailing out each and every risky bank, and thus allowing no more risk in any investment (for the time being), has been the very simple observation that massively mispriced risk has gotten concentrated to an unparalleled degree among very few players. The population of Big Banks has been massively trimmed (Goldman thanks everyone for allowing them to have massive Fixed Income bid/ask spreads) and now a mere five banks account for the bulk of loans, deposits, and derivative exposure. When the economy is faced with another Lehman event at some point in the future, when bailing one of the Big 5 is no longer feasible, the delayed consequences which have so far been successfully swept under the rug, will come back in time and bury any positive legacy that the Man Of The Year may have created. One indication that this time may be sooner than most think comes out of the St. Louis Fed itself, which has released a paper titled "The evolving size distribution of banks" in which it highlights the expected: big banks are getting bigger, and are holding a record share of all rosky assets. When the asset repricing moment occurs, absent an apriori renewal of Glass-Stagall, look for the inevitable moment of complete House Of Cards collapse.
Key points from the St. Louis Fed:
Fundamental issues about bank size and the systemic risk implications of so-called too-big-to fail policies are heated topics of discussion for researchers, policymakers, and the press alike. However, significant changes in size distribution of banks have been occurring since at least the 1980s and 1990s, when the structure of the banking industry began to evolve following regulatory changes such as the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and the Gramm-Leach-Bliley Financial Services Modernization Act of 1999.
To document the changes in the size To document the changes in the size distribution of banks, we study total assets of commercial banks using the public Call Reports for three selected dates: 1987:Q2, 1998:Q2, and 2009:Q2.2 During these 22 years the number of banks fell from 15,168 to 10,169 and then to 7,744 after progressive concentration of the industry and bank failures, particularly during the Savings and Loan Crisis of the late 1980s and early 1990s and the current financial crisis.
Many key facts can be noticed using this chart. First, the total number of banks in the United States has substantially decreased, although the number is still considered large by international standards. Second, over time the increase in the number of relatively larger banks stretched the tail of the distribution to the right, a common measure of the asymmetry of a distribution around its meanthe skewness of the distribution increased from 0.92 in 1987 to 0.95 in 2009. Third, the largest banks own an even larger share of total assets, making the right tail of the distribution even thicker, a measure of the thickness of a distribution tailthe kurtosishas increased from 5.4 in 1987 to 6.7 in 2009. If we dropped the largest 50 banks, the kurtosis would increase by much less and the skewness would fall instead of increasing.
Hence, the flattening of the bank size distribution is part of a long-term trend and may have led to a more concentrated industry with larger average-size and big banks independently of the recent financial crisis and the concurrent policy interventions. The current debate on too big to fail is important because it clarifies the tension between profitability, propensity to take risk, economies of scale, and economies of diversification on the one hand, and the competitive and systemic risks imposed by fewer larger yet more complex players on the other hand. However, if limiting the size of large banks were considered appropriate to reduce systemic risk, it would be a clear change of direction relative to the long-term evolution of the industry. When the St. Louis Fed is telling its master it is time to take appropriate measure to mitigate TBTF risk, politicians better listen. And yes, even though Wall Street indulgences are sure to dry up overnight if some form of Glass-Steagall is to be put in place, this law, and particularly the immediate repeal of Gramm-Leach-Bliley are critical in advance of the next major risk flaring episode. Granted such an episode will likely never come as long as the Fed keeps pumping trillions of excess liquidity into the economy (or more specifically into bales of cash held in bank basements where it sits useless, collecting 0.25%), there is a technical limit on how much longer this reckless behaviour can persist, and it comes roughly in line with the dollar hitting a value of zero. Courtesy of Bernanke, we are already well on our way there.
Another good one
We wouldn’t want anything to get too big and powerful now would we? *cough* federal government *cough*
An Examination of the Gramm Leach Bliley Act
Five Years After Its Passage
July 13, 2004
In the decade-long debate that led to enactment of the Gramm Leach Bliley Act (GLBA)in 1999, Congress heard many promises from financial services industry representatives about how tearing down the barriers between banking, securities and insurance sectors would be a boon to consumers. Banks, securities firms and insurance companies would merge into financial services supermarkets that offer increased consumer access to new, innovative products at lower costs with improved privacy protections.
Five years later, this rhetoric has proven to be mostly hype. Mergers have occurred, but mostly within the banking industry, not across sectors. While some, primarily affluent
consumers may benefit from larger multi-state ATM networks, from discounts offered for multiple account relationships or from sophisticated financial products offered by boutique units to high-balance customers, we have seen no evidence that GLBA has positively affected the mass of banking consumers. It hasnt slowed the continuing trend of rising bank fees, nor has it helped decrease the numbers of unbanked consumers. Indeed, rather than offering innovative,
moderately priced products to middle income consumers, or to unbanked consumers to bring them into the financial mainstream, some banks are developing policies and services that deliver second class or downright predatory products at an extremely high cost.
The corporate scandals of the last few years have also exposed potentially significant safety and soundness risks in allowing banks to sell both credit and investment banking services with inadequate regulatory oversight. The exponential growth of Industrial Loan Companies, which were allowed to continue to exist under GLBA without facing the rigorous regulatory scrutiny required of bank holding companies, has also started to create concerns that this shadow banking system could put taxpayer-backed deposits at risk.
GREAT ARTICLE ping.
This follows up on Volker’s recent comments on how no action has been taken yet regarding “too big to fail” banks. Banks should should not be allowed to gamble with other people’s money, they should only be allowed to hedge positions (not gamble), and bank holding companies should be abolished (otherwise they’d hide bad loans among their subsidiaries).
What’s also interesting is how the best in depth reporting is now coming from individuals over the internet... not from journalists. The internet is proving to be the kiss of death for big media, who has been hiring nothing but biased or stupid reporters who are so blinded that they miss the big stories or squelch them. I looked up this web site’s mission (www.zerohedge.com) and we must give a hat tip to what they’re doing:
* to skeptically examine and, where necessary, attack the flaccid institution that financial journalism has become.
* to liberate oppressed knowledge.
* to provide analysis uninhibited by political constraint.
* to facilitate information’s unending quest for freedom.
However in the end the real failure was bailing out the banks whether or not we had that in place although it certainly would have diminished the size of the problem had they been left to fail that would have been Capitalism.
Not letting them fail has blackened both the eyes of Capitalism in the worlds viewpoint. A great harm was done by giving them a Socialist handout privatizing the profit and socializing the losses. People don’t understand it was not capitalism itself that failed it was the response.
Start with bumping the"standard" loan loss reserve from 75 basis points to say two to three percent. Bump the liquidity standard too.