Financial reform is a core issue for Bernie Sanders and is a popular one with the voters as well. If Hillary gets the Democratic Party nomination, which is pretty much a certainty at this point, it will be a big issue for her future administration as well. Any financial reform package will almost certainly be largely based on breaking up the “too big to fail” banks. The debate up to now has centered on whether this would require new laws passed by Congress or simply through the Federal Reserve creating new regulations-chiefly by dramatically increasing the existing capital/asset ratio requirements forcing excessively large banks downsize. The objective is less financial stability than to reduce the political power of the big banks which obliges the federal government to bail them out in a crisis lest the entire economy collapse. This is one of the lessons learned from the 2008 financial meltdown and Democratic Party candidates are eager to address the issue.
To begin with, bank concentration has been driven by the financialization of the US (and global) economy which is itself closely linked to globalization. A recent study by the Federal Reserve Bank of Dallas shows that trends in commercial bank concentration since the 1970s have been dramatic. According to the study;
From 1975 to 2015, commercial bank assets as a share of GDP increased by about 70 per-cent. Not only did the U.S. banking system grow in size relative to the economy as a whole, but its composition and concentration also drastically changed starting in the 1990s...Over the last three decades, for example, the number of U.S. commercial banks has fallen from more than 14,000 to less than 6,000 while the average size of commercial banks has simultaneously increased five-fold in terms of real total assets.
The study cites several causes of this trend including the repeal of the Glass Steagall Act (1933), the gradual removal of interstate banking regulations during the 1990s and the obvious returns to scale. To this could be added such causes as the general expansion of the financial sector’s size and scope of activities such as a wide variety of derivatives trading that didn’t exist in the past. The study seems inconclusive as to whether or not such trends add risk to the overall financial system but it seems to imply that the growing levels of risk itself has actually contributed significantly to recent trends in bank holding company asset concentration. In any case, the trends are clearly indisputable. Most reliable sources agree that the five largest US bank holding companies control nearly half the financial financial industry’s $15 trillion in assets with an average annual return on assets significantly above that of their smaller competitors. Given these trends it is no wonder that the US financial sector’s share of total corporate profits has grown over the past fifty years from about 15% of the total to fully a third currently!
Some studies, such as one analyzing trends over the course of the 1990s by the New York Fed, attributes the growth in concentration to the flurry of Mergers and Acquisitions since during the 1990s (and beyond) which it refers to as external growth rather than through the internal growth of commercial bank market share. In any case, it is clear that the rise of bank holding companies that have resulted with the post 1990s trend in financial deregulation has vastly concentrated US financial industry assets. This trend is what created the problem of “too big to fail” banks. It is this very issue that has become so politically compelling in recent times.
To be sure, arguments against breaking up the big banks abound. Opponents of the idea point out that it wouldn’t contribute to financial stability while it would only disadvantage US banks against potentially larger foreign competitors who aren’t forced to downsize. This was a major argument for deregulation in the first place! Opponents further warn of potential resulting credit shortages and argue that the new Dodd-Frank regulations are sufficient to solve the problem of to big to fail banks pointing out that it wasn’t the size of the banks per se that caused the 2008 crash but the risky financial activities permitted by a lack of proper regulation. The opponents have a point. But despite this fact, they fail to deal with the political power large financial institutions accrue through sheer growth. This is the core argument of the Sanders campaign; Too big to fail is simply to big!
The Sanders Campaign points out in its literature that after the bailouts that the followed the recent crash, the big banks profited enormously-in 2014 they made roughly $152 billion in sheer profit, a historic record! Much of the profit is from speculative activity rather than the funding of economic growth for the middle class. The dangers of this trend was made clear in the crash of 2008. One Forbes commentator made this assessment;
Because all the big banks’ had been involved to an unknown degree in risky derivative trading, no one could tell whether any particular financial institution might suddenly implode...Financial reform didn’t work. Banks today are bigger and more opaque than ever, and they continue to trade in derivatives in many of the same ways they did before the crash, but on a larger scale and with precisely the same unknown risks...The bulk of this derivative trading is conducted by the big banks...The total notional value, or face value, of the global derivatives market when the housing bubble popped in 2007 stood at around $500 trillion…
The commentator also ran through a list of criminal activities of the big banks such as money laundering and securities fraud but the point is that all this has its roots in the expansion of a financial industry based not on economic growth but on the decline of the middle class economy leaving speculation as the core profit making activity for banks. Such speculative activity, which continues to grow, greatly concentrated the financial industry particularly with the failure of so many banks during the crisis. It is primarily the big banks that can bear the risk of financial speculation which is especially tempting when federal bailouts are expected. According to a 2014 article in the Guardian,”The derivatives business is a lucrative and concentrated one: 95% of the trading in derivatives in the US are done by the five biggest banks, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and JP Morgan.” Speculating with FDIC insured deposits was prevented by Glass-Steagall and the Dodd Frank reform isn’t strong enough to eliminate the problem which is driven not only by deregulation and a low federal funds rate but by a lack of productive activity in which to invest due to the marked drop in middle class purchasing power. Thus, bank asset concentration is closely associated with the general trend in economic inequality and middle class decline which is a core issue for Sanders. Reversing inequality also means reducing average bank size-which would also control average lending rates to consumers-and restoring banks to their traditional role funding economic growth rather than functioning purely as casinos.
The good news is that proposals to break up the big banks has lots of support from the Fed which is the banks chief regulatory agency. A Bloomberg’s report from earlier this year shows that many regional Fed presidents support the idea. Most prominently, Richard Fisher, former Dallas Fed chairman, has been quite vocal about downsizing the big banks to reduce the risk of bailouts. US Fed chair Janet Yellen is not warm to the idea, however. Given this fact, bank restructuring is certainly politically feasible in addition to economically desirable. Such a measure is vital to restoring a middle class economy in the US.
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