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Oonagh McDonaldAuthor, Speaker, Consultant
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Break up Large Banks and All will Be Well?

9/17/2015

 
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Bernie Sanders threw his hat into the U.S. Presidential candidate ring with this fiery statement: “It’s time to break up the largest institutions in the country! If a bank is ‘too big to fail’ it is too big to exist!”

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.



All best,

Dr. Oonagh McDonald, CBE

Department of Justice Has Change of Heart, Will Attempt to Hold Executives Accountable

9/14/2015

 
On September 9, the Department of Justice (DOJ) issued a Memorandum entitled “Individual Accountability for Corporate Wrongdoing,” no doubt in response to the widespread criticisms of the failure to hold any senior executives to account for the banking crisis.
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According to the DOJ, such accountability:
  • Deters future illegal activity
  • Incentivizes changes in corporate behaviour
  • Ensures that the proper parties are held responsible for their actions
  • Promotes the public’s confidence in the U.S. justice system

It should be noted however that holding individuals accountable is much more difficult than may first appear. For that to be effective for banks, that would require some fundamental changes in banking laws and regulations, such that banks could not hide who was responsible for what decisions. That has yet to come – and the timing of those types of banking laws and regulations is uncertain.

Another question to ponder:  Do fines change the culture of the bank?

In my opinion, probably not. But the trend for prosecutors even before the crisis has been to prosecute companies rather than high-level individuals. This is presented as “transforming the corporate culture” because the various deferred prosecution agreements and non-prosecution agreements are ones in which the company agreed to take various measures to prevent such occurrences in the future. But perhaps in these cases the fines were about “recovering funds that are due to the American taxpayer”, as Freddie Mac’s CEO, Donald H Layton said in 2013. That leaves open the question of holding senior executives accountable and accountability in the future. That is really, in my opinion, the issue to be addressed.

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.

I am excited to herald the arrival of my next book, Lehman Brothers: A Crisis of Value (Manchester University Press, November, 2015), and to discuss these important matters with concerned citizens and business leaders in the U.S.

All best,

Dr. Oonagh McDonald, CBE

Holding Banks to Account after the Financial Crisis

9/9/2015

 
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I am happy to announce that the Journal of Financial Crime has published some of my initial findings on the ways the United States has sought to hold the leading banks to account for the financial crisis and to assess the validity of the methods used. The full research and findings will be published in the inaugural issue of the Journal of Financial Crime, in a two-part series in January 2016. As we lead up to the release of my next book, due out November 2015 -- which focuses on the collapse of Lehman Brothers -- the articles in the Journal of Financial Crime may be of interest to those who, like me, seek to understand what happened and, more importantly, how it could happen again if the right stops are not put in place. 

I will be in the United States the last two weeks of September and an hoping to meet with business professionals, politicians, journalists and other academics to discuss my work and the current state of affairs in the world. To schedule a meeting while I am in New York City and/or Washington DC September 22 - Oct 2, please call 800-974-7753 or email my publicist Alfred Martin at Impact Communications.

Click here to read the summary of my initial findings in the Journal of Financial Crime.

All best,
Dr. Oonagh McDonald, CBE

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