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Wednesday, September 21, 2011

Bank One: Adding to Systemic Risk

How soon we forget. How soon the financial crisis in September 2008 was relegated or even forgotten. Exactly three years later, the New York Times reported that Republicans have been repeatedly invoking the Dodd-Frank Act’s 848-page length and rules on trading derivatives and swaps as instances of government overreach at the expense of much-needed jobs. “Dodd-Frank is adding safety margins to the banking system,” according to Douglas Elliott at the Brookings Institution. “That may mean somewhat fewer jobs in normal years, in exchange for the benefit of avoiding something like what we just went through in the financial crisis, which was an immense job killer.” To scrap the new law in order to save few jobs would thus be short-sighted even with regard to jobs.

The New York Times points out that the Dodd-Frank law “aims to rein in abusive lending practices and high-risk bets on complex derivative securities that nearly drove the banking system off a cliff.” The banks themselves cannot be relied on to forestall such “cliff-diving” because they are looking out for their own financial interest rather than at the viability of the financial system as a whole.

For example, at the Federal Reserve hearing on September 20, 2011 on Capital One’s proposed takeover of ING, John Finneran, Capital One’s general counsel, said the “acquisition of ING Direct will further reduce, rather than increase, any risk to the financial system.” But the combination would have around $200 billion in deposits (moving the bank from No. 8 to No. 5 in the U.S.), which the New York Times claims raises “questions about the deal’s impact on customers and the broader economy.” John Finneran’s claim of lower risk, being self-serving to the bank, requires further support. To be sure, he did argue that the deal would “not lessen competition or result in any undue concentration of resources.” But he is thinking in terms of restraint of trade more so than systemic risk. Regarding the latter, John Taylor of the National Community Reinvestment Coalition, pointed to the risky subprime loans in the bank’s credit card portfolio. Before the hearing, he had asked, “We already have four too-big-to-fail banks. Why make a fifth?”

That the proposal to carve up the four $1 trillion plus banks was summarily dismissed as Dodd-Frank was being written (with the help of the banking lobby, which Sen. Durbin said still owned Congress) was apparently not enough; preventing an increase in the number of mega-banks too big to fail would still go too far, at least from the vantage point of the banks and, presumably, the Republican party as well. This view was expressed by Dan Tarullo, a Federal Reserve governor. “While Congress instructed us to consider the extent to which a proposed acquisition would pose a greater risk to financial stability, it clearly did not instruct us to reject an acquisition simply because there would be any increase in such risks.” I contend that Tartullo’s stance is wrongheaded and even dangerous.

The continued existence of banks with assets of over $1 trillion is itself allowing for enough systemic risk to tank the system. Increasing such risk by permitting Bank One to continue “amassing a big national banking franchise” ignores the risk of there being too much systemic risk in the system already. It is highly unlikely that merely increasing capital requirements for the biggest banks and providing for their possible liquidations has reduced the systemic risk in the system to a tolerable level. Therefore, the last thing we should be doing is adding to such risk by enabling another giant to form.  We do have control over whether more systemic risk is loaded on the system, unless we want to pretend that the concern itself is government encroachment on banks that are somehow no threat to the system itself. Is it too much to ask for some learning curve in the wake of September 2008, or is history destined to repeat itself from short-sightedness and continued greed? That the anti-regulation argument has been made at all in the three years following the financial crisis of 2008—as if in utter denial—does not bode well for American democracy (or plutocracy).



Sources:

Edward Wyatt, “Dodd-Frank Act a Favorite Target for Republicans Laying Blame,” New York Times, September 21, 2011. http://www.nytimes.com/2011/09/21/business/dodd-frank-act-is-a-target-on-gop-campaign-trail.html

Ben Protess, “Capital One Denies ING Takeover Would Make It ‘Too Big to Fail’,” New York Times, September 21, 2011. http://dealbook.nytimes.com/2011/09/20/capital-one-defends-ing-direct-deal/