Monday, August 3, 2009

Too Big To Fail : A Tentative List

Who is too big to fail? Simon Johnson (The Baseline Scenario, August 1, 2009) refers the reader to the 2004 Brookings book by Gary Stern and Ron Feldman, “Too Big To Fail: The Hazards of Bank Bailouts”, and especially to their list of such banks “on the basis of their qualitative assessment, reading of the regulatory tea leaves, and a deep understanding of the available data”.

Here are the first 17 largest banks of their Box 4-1 out of a list of 34:

Bank ( Assets in billions of US dollars)

Citicorp (1.068)
J.P. Morgan Chase and Company (799)
Bank of America Corporation (640)
Deutsche Bank AG (514)
Misuho Holdings (422)
Stitching Prioriteit ABN AMRO (382)
UBS AG (357)
Wachovia Corporation (326)
Wells Fargo and Company (298)
Bank One Corporation (270)
Credit Suisse Group (255)
MetLife (252)
HSBC Holdings PLC (240)
FleetBoston Financial Corporation (202)
U.S. Bankcorp (168)
BNP Paribas SA (119)
Mitsubishi Tokyo Financial Group (114)

At a time when the financial industry that was bailed out at taxpayer expense is paying itself gigantic bonuses while the economy is still deeply depressed (as Paul Krugman writes in the New York Times, “Rewarding Bad Actors”), Josef Ackerman, head of the Deutsche Bank and of the global bankers’ trade union, the Institute of International Finance, makes the case for big banks in the Financial Times. The problem, he writes, is not size, but that the banks are too interconnected to be allowed to fail.

This would not be the case if the “narrow banking proposal” or other “classical banking” schemes were adopted. Separate lines of business would be served by specialized institutions, each of which would be of a size small enough (as defined by regulation) not to jeopardize the security of the whole system.

See also the commentary in the August 2 issue of the Financial Times by Tony Jackson, with a proposal that banks be obliged to pay insurance premiums in every country where they do business not only to insure against going bust but also in case they should be rescued (“A bank-weary taxpayer’s pipe-dream”).

“The obvious counter is if one country introduced such a scheme, banks would emigrate. But the simpler and more local the banks, the less that is an option.”

That’s why narrow banking and small size limits are now necessary.

The Classical Banking Club welcomes Paul Krugman and Tony Jackson.

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