Let’s take a closer look at this clarion call:
Underlying Sander’s call for smaller banks is the belief that small is beautiful, with the assumption that the banks should somehow not be interested in making profits or in doing anything else but serving the community. Unfortunately that is simply not true – or a real possibility in the future.
Many small and medium-sized banks failed during the financial crisis. The Federal Deposit Insurance Corporation provides a list of the number of bank failures in each year. There were only 3 in 2007. But that number rose to 157 in 2010 at the peak of the financial crisis. Thankfully, the closures slowly declined until the number reached 18 in 2014. The estimated cost of the failure of the federally insured banks is estimated at some $ 70 billion between 2008 and 2010.
Altogether, 417 banks and thrifts failed from the beginning of 2006 through to 2011. Apart from bank failures, many banks with assets of less than $100 million have exited the economy themselves as a result of mergers, consolidations as well as failures. The mergers and consolidations were because they could not make a profit at that size.
That is not just a matter of competition. It is because the costs of the technology banks need now continue to rise—and small banks simply cannot afford it. That is the case not only in the USA but in other countries as well. For example, co-operative banks in Germany share technology and have done for many years, yet the number continues to decline. Regulators there as in the USA and elsewhere encourage mergers and acquisitions in order to prevent bank failures. Regulatory costs fall more heavily on the smaller banks, but they still require supervision and sufficient capital to back their lending.
Simply limiting the size of banks might solve the “too big to fail” concern, but limiting the size of banks is, on the flip side, more likely to raise the costs of providing banking services, which even for medium sized firms exporting goods, would include currency hedging. These are not just “esoteric financial products” but essential for firms engaging in trade. No doubt Mr. Sanders would regard such hedging as an esoteric financial product. But modern banking in a global world is much more than straightforward loans to small firms, mortgages and car loans.
I would argue that large banks can obtain the expertise to provide more sophisticated services, which the large companies in the USA need. Size limits (and exactly how big would be too big?) could well increase the costs of providing banking services as large banks can spread the cost of all the developments in banking technology and provide services more cheaply. Not only does Sanders’ proposed bill set aside the issue of how big is too big, but it fails to say what would happen if a successful bank grew much more quickly than its competitors. The reward for success would be to limit success? Government intervention in a free market would be essential to keep the banks within whatever the pre-determined limits would be.
For the causes of the financial crisis, Mr Sanders must look elsewhere: to the government housing policies, designed to encourage banks to lend money for house purchases to those on low and very low incomes and minorities, who could not possibly continue to pay their mortgages. This is not a bill, enticing as it may be, to which citizens should lend their support. It is far too simplistic.
Bad bank lending is generally the cause of bank failures. And if we look back in time we can clearly see that the government housing policies of the 1990s-2000s (because they more than encouraged lending to those with too little money to pay back the loans) were the real cause of bank failures.
I will be in New York City next week, September 21-25, and in Washington, DC, September 28 – October 2. If you would like to meet to discuss my work, please contact my publicist in the U.S., AlMartin@ImpactCommunications.org / 800-974-7753.
My new book, Lehman Brothers: A Crisis of Value (Manchester University Press, November, 2015), will be out soon. I would be happy to discuss these important matters with concerned citizens and business leaders in the U.S.
Dr. Oonagh McDonald, CBE