Finance

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

The catchphrase that has stuck to big banks is, obviously, that they are "too big to fail." As a result, the industry has focused its efforts on fighting that perception, arguing that the 2010 Dodd-Frank financial overhaul law and other reforms adopted since the financial crisis have made them sturdy enough to withstand another crisis without needing to turn to taxpayers with hats in hand.

Consider, for example, the comment letter sent to the Federal Reserve from five financial-industry lobbying groups that was released on Monday. (See this article from Ian Katz and Jesse Hamilton for more details.)

The letter goes through the industry's quibbles with the nuts and bolts of the Fed's plan to bolster financial firms' "total loss absorbing capacity," or TLAC. The main thrust is that the Fed's loss cushion of at least 16 percent of risk-weighted assets by 2019 and 18 percent by 2022 is too high. Furthermore, the industry would rather have the option of issuing either equity and debt or both, rather than being obliged to issue big chunks of long-term debt.   

What sticks out in this election year, however, is the pushback against those who think that too big to fail, or TBTF, is even a problem anymore:

There unquestionably remain some political or media misconceptions that TBTF is alive and well, which can only be based on a failure to understand that the reforms described above have occurred or have had such impact. We strongly urge the Federal Reserve to explain clearly the importance of any final TLAC rule and its impact in ending TBTF. Certainly, we would urge the Federal Reserve not to increase the stringency of the final TLAC (or other) rule in order to address a misconception that is at odds with legal and market reality.

Silly media and politicians! Too big to fail is totes a 2008 problem that's long since been fixed, just ask any financial-industry lobbyist!

The thing is, the lobbyists may very well be right about that. It's hard to know for sure without a time machine. Is even a watered-down version of the TLAC plan enough to prevent a bank failure from becoming a systemic problem in our lifetimes? Perhaps. Then again, maybe not.

Still, even if the banks are able to accomplish the unlikely and get all the politicians and media -- oh, and don't forget new Minneapolis Fed President Neel Kashkari -- to agree that they're sturdy enough, stress-tested enough, and have the right living wills in place to avoid the need for future bailouts, will that make the backlash go away?

The answer is probably not. And the reason is that the catchphrase "too big to fail" is no longer entirely what the existential threat to the universal banking model is all about. In fact, the catchphrase could be cut in half to more accurately describe the resentment: "too big."

The case Bernie Sanders is making for breaking up the banks relies largely on just throwing around some numbers describing how big they are: the six largest hold assets equal to 60 percent of the U.S. economy; they issue more than two-thirds of all credit cards and 35 percent of mortgages; they control 95 percent of all derivatives; they hold more than 40 percent of the nation's bank deposits.

Big Leagues
The trillions of dollars in assets held by the biggest financial firms have created a backlash.
Source: Bloomberg data, based on latest company filings.

The implication, as Sanders' own catchphrase says, is that banks aren't just too big to fail, they're simply too big to exist. Their influence on the economy has grown too large.

And ironically, the lobbying groups may have buttressed that argument in the comment letter by pointing out that the Fed's loss-absorbing rules will increase borrowing costs for big banks, which could mean higher interest rates or reduced credit for their customers, resulting in risks to the economy.

So a dilemma. Accept the Fed's plan for big banks to absorb big losses and live with the risks to the economy that their lobbyists say will follow. Or water down the plan and live with the risk that it didn't go far enough.

Neither solution does much to defend banks from the notion that they're too big to exist, failure or not. In order to turn the populist tide, they need to make a stronger case as to why their existence is beneficial: the economies of scale, the safety of diversification, the fact that it's easier to regulate a handful of big companies than hordes of smaller ones.

They better hurry up. Kashkari is waiting

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net