Seven Dumb Things Bankers Say

Mark Whitehouse writes editorials on global economics and finance for Bloomberg View. He covered economics for the Wall Street Journal and served as deputy bureau chief in London. He was previously the founding managing editor of Vedomosti, a Russian-language business daily.
Read More.
a | A

Many of the arguments used to justify the size of the largest U.S. financial institutions simply don't stand up to scrutiny. It's important that folks in Washington keep this in mind as the political debate over what to do about too-big-to-fail banks heats up.

A number of the bankers' talking points are encapsulated in a report, issued as part of a Wall Street public-relations campaign, that appears to be getting some attention inside the Beltway. Politico's Morning Money mentioned it in February, and this week Bloomberg View columnist Ezra Klein cited it an article on the state of efforts to rein in too-big-to-fail banks.

Before we dig in, a bit of context: Critics of the big banks -- including the editors of Bloomberg View -- argue that the main advantage of being a JPMorgan-size giant is the ability to extract a subsidy from taxpayers. The larger and more systemically threatening banks are, the more confident they and their creditors can be that the government will bail them out in an emergency. This too-big-to-fail status allows such banks to borrow at lower rates than they otherwise would -- a perverse incentive that undermines market discipline, artificially bloats the financial sector and promotes the kind of credit binges that end in crises.

The report in question, published by the public-affairs consulting firm Hamilton Place Strategies, asserts that such reasoning ignores "the value of large banks to the global economy and their growth over time, the dramatic improvements in safety and soundness over the past three years, and the context of international competition." It goes on to say that breaking up the banks -- or, we can assume, other policies that would result in their shrinkage, such as higher capital requirements -- would favor "foreign banks and the nonbank financial sector."

Let's examine the report's points.

  1. The U.S. banking sector has grown proportionately with the rest of the economy.

    To make this point, the report uses a couple unusual proxies for the U.S. economy: The S&P 500 stock index and U.S. exports. It provides a chart showing how these two indicators grew almost exactly as much as the assets of U.S. commercial banks from 1990 to 2012.

    The most widely used measure of the U.S. economy -- gross domestic product -- gives a different answer. From 1992 (the earliest data from the Federal Deposit Insurance Corp.) to 2012, the assets of all U.S. commercial banks grew from about 70 percent of GDP to 91 percent of GDP. Over the same period, the assets of the five largest commercial banks (under U.S. accounting rules) went from about 9 percent of GDP to 40 percent of GDP. The picture is even more striking when using international accounting rules, which capture more of the derivatives that have become a big part of the largest banks' businesses over the past decade. By this measure, the assets of the five largest U.S. banking companies (a slightly different group than in the FDIC data) equaled about 90 percent of GDP as of mid-2012.

    In other words, the too-big-to-fail banks have ballooned in relation to the broader economy.

  2. Growth of the largest U.S. banks did not outpace the growth of the global economy.

    Here, the report presents data showing that the global market share of the largest U.S. banks has grown since 1990, but is lower than it was in 1970. Why global market share should matter is a mystery: If other countries' taxpayers want to encourage their banks to threaten the economy, that doesn't mean we should follow suit in the name of global competition.

    Even so, the report's conclusions on bank size and the global economy are wrong. The assets of the five largest U.S. commercial banks (under U.S. accounting rules) grew from about 2 percent of world GDP in 1992 to about 9 percent in 2012 (with GDP measured at prevailing exchange rates). Under international accounting rules, the assets of the top five U.S. banks equaled about 20 percent of global GDP as of mid-2012.

  3. Global banks make a complex world simple.

    The point here is that global banks are great because multi-national corporations can go to one place for all the services they need. This may be true, but it's an argument for being global, not for being big. JPMorgan Chase & Co. doesn't need $4 trillion in assets (under international accounting rules) to serve global companies. As the U.S. Senate investigation into JPMorgan's London Whale trading losses has shown, organizations that combine everything from retail banking to speculative derivatives trading under one roof are beyond the comprehension of their own executives, let alone their boards, clients and investors. They make a complex world more complex.

  4. Big U.S. banks are significantly safer than prior to the crisis.

    The report cites an increase in regulators' preferred measure of soundness -- the Tier 1 common risk-based ratio -- as well as an increase in tangible equity as indicators of banks' safety. It's true that these measures have risen. Problem is, as Frank Partnoy and Jesse Eisinger demonstrate in a recent article, the state of accounting in the financial sector is such that we can't really know whether such indicators mean the banks have become safer.

    Even if the banks have improved, they're far from safe. Under international accounting standards, JPMorgan's tangible equity was only 3.1 percent of tangible assets as of mid-2012. This means a decline of 3.1 percent in the value of the bank's assets could be enough to render it insolvent. Research by economists at the Bank of England, and a new book by financial economists Anat Admati and Martin Hellwig, suggest banks need at least 20 percent equity if they want to avoid failures.

    The report also denies that the largest U.S. banks enjoy a funding advantage thanks to their too-big-to-fail status. Bloomberg View has dealt with this argument at length here and here.

  5. U.S. banks are not the largest among global players.

    The report points out that, under U.S. accounting standards or compared with their local economies, some foreign banks are even bigger than U.S. banks. It's not clear why this is good. Again, if other countries have an even bigger too-big-to-fail problem, that doesn't mean the U.S. shouldn't be concerned about its own.

    Also, under international accounting standards, U.S. banks are the largest. With about $4 trillion in assets, JPMorgan is the biggest bank on the planet. Bank of America is a close second.

  6. Big global companies will turn to foreign banks -- maybe even Chinese banks -- if the big U.S. banks are broken up.

    Again, it's highly doubtful that JPMorgan needs a $4 trillion balance sheet to attract global business. To use the report's own example, an $11.8 billion Wal-Mart Stores Inc. deal was the largest syndicated loan in the U.S. as of the third quarter of 2012, with six banks involved. Beyond that, most large corporations get their debt financing in the bond markets.

    That said, if foreign governments want to subsidize bank credit to U.S. multi-nationals, the U.S. gets the benefit while other countries' taxpayers bear the cost. Trying to compete by maintaining subsidies to our own banks would be like trying to match China's growth in global share of pollution. It's a race to the bottom.

    Conversely, reining in the biggest U.S. banks, and making them easier to understand, might actually enhance the global position of the U.S. financial industry. The share prices of U.S. banks are suffering in part because investors find the banks' finances incomprehensible (see that article by Partnoy and Eisinger). In a world of opacity, demonstrable safety and soundness could be a good selling point.

  7. Breaking up the big banks will cause more financial activity to go into the unregulated world of shadow banking.

    Alternative financing channels such as money-market mutual funds, conduits and structured investment vehicles proved to be a weak link during the financial crisis. It's not clear, however, why making banks smaller and more transparent would cause more shadow activity. Even if it did, it's not a point in favor of big banks. Rather, it suggests regulators should pay more attention to the shadowy areas -- for example, by forbidding the unsupported dollar-a-share guarantees that make money-market accounts seem as safe as insured bank deposits. Regulators should also take advantage of the powers the Dodd-Frank financial reform law granted them to oversee systemically important non-bank financiers.

Total good points: zero.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Whitehouse at