'Too Big to Jail' Admission Changes Debate | Hacker News Reader

'Too Big to Jail' Admission Changes Debate

americanbanker.com

90 pointscdvonstinkpot26 comments

I have worked with a number of banks and credit unions. One of the biggest challenges on the regulatory side is that of unintended consequences. Lawmakers create a policy meaning to spare regional banks/credit unions, but ultimately they get carried along because their 3rd party providers have to comply (core processors, Visa, etc.), which pass along those costs/rules inevitably to the smaller organization.

Pros: Capital would be lent more efficiently as region's know their markets/customers better. Generally better service. Possibly fewer loan losses due to knowing the local market better.

Cons: The largest drawback is that of security, as many regional banks/credit unions are amazingly insecure. Cost to the consumer would probably go up slightly in the form of higher loan rates and lower savings rates, but it could easily be argued large banks aren't distributing these savings anyway.

The most amazing piece I've seen was when TARP money was given to the banking industry with the goal of it being lent to consumers and businesses. Instead the capital was used to fuel M&A within the banking industry which ultimately lead to fewer jobs.

In order to regain trust in banking, what is needed is a real change in culture, embedding integrity and eradicating the 'what can I get away with’ attitude. - Iain Coke, Head of Financial Services Faculty, Institute of Chartered Accountants (UK), September 2012. As quoted in http://www.telegraph.co.uk/finance/libor-scandal/9574676/Lib...

We need to rethink as a society what banks are for, what exchanges are for, and what clearing houses are for. If they are for the profit of the few at the expense of the many now, that is because it is the business model we have permitted. If banks, markets and clearing are protected because they have a social function, we should make certain that social function is adding value. If it isn't, then we need some new models and some new rules. - The London Banker, July 2012. http://londonbanker.blogspot.co.uk/2012/07/lies-damn-lies-an...

The `Too Big to Jail' was coined by Matt Taibbi in http://www.rollingstone.com/politics/news/why-isnt-wall-stre..., which goes through great many details on the matter. I believe the catchy phrase did much to bring popular awareness to the issue.

What would be the economic consequences of breaking up big banks?

Slightly higher interest rates - in theory.

greater redundancy through autonomous systems?

Interesting suggestion. One of the unintended consequences of some research my company conducted last year with a view towards bridging disparate settlement systems through objective description of their properties was the realization that existing financial services platforms rarely have redundancy; we would be adding this to resulting systems for free. For some results on the open side of that research, somewhat stalled early this year but moving along soon, see http://ifex-project.org/ ... thoughts/contributions very much welcome.

Great Kindle Single on breaking up the big banks: http://www.amazon.com/Megabanks-Mess-Kindle-Single-ebook/dp/...

This says it's not available for purchase for customers from the United States. Any other source?

It depends on what "breaking up the banks" means.

If we just mean to break them up into smaller banks, it is hard to say whether negating the benefits of scale will raise costs higher than the competitive pressure of no longer having dominant institutions effectively being able to set prices.

If we mean to break up securities trading and deposit-taking divisions into separate institutions (as Glass-Stegall was meant to enforce until repealed) then we may see a return to a more stable Wall Street, as the house would be forced to play it's own money instead of yours, and 'banking' will be pure and boring again.

There's evidence that bigger and bigger banks don't achieve more efficiency: http://www.washingtonsblog.com/2009/10/big-banks-are-not-mor...

There is also that the largest banks have the implicit support of the federal government, and therefore have an artificially low cost of capital relative to smaller banks (because the Feds will prevent a default). That benefits someone somehow, although it can be hard to figure out who.

This, for me, is ultimately the major reason that private banking institutions, as they are currently formed, must be changed.

The implicit and even explicit backing of a government of a private institution, forced as a result of that bank's size and market impact, allows that institution to take larger risks and to privatise profits that are generated as a result of the public's support.

This is a major unintended consequence of saving big banks during the financial crisis.

yep, privatized profit, but socialized losses.

Not all that hard to figure out who:

http://www.theatlanticwire.com/business/2013/02/banker-bonus...

It is interesting to see that banks' employees and not, say, their shareholders are able to extract the benefit.

That's kind of how banks work, too big to fail or not. You don't see the same thing happening at GM, for example, who also benefits from governmentally subsidized cost of capital.

It benefits the top management of the big banks. (In theory, the stockholders benefit too if they let more of the profits trickle down to the stockholders.) They will take more risks than they otherwise would. They figure that if the risk pays off, they become richer. If the risk does not pay off, they don't have to worry about losing anything (?everything?) financially because the Feds will bail them out.

Large mistakes and crimes would have smaller impact.

As one commenter said it before: slightly higher rates (due to competition).

Another one would be: target of acquisition of a bigger international banks (HSBC comes to mind). Slowly the govt. has to regulate that as well or else ...

Slightly higher rates would not be due to competition, but the reduced economies of scale and the perceived increased risk from relying on potentially fewer clients and a smaller loan book. A reduction in the Return on Equity could help to compensate to lower interest rate, but then the bank may not be as favoured or valued as highly by investors.

Maybe somebody smarter than me might know more, but I think if you break up a bank, you have to sell off its assets or transfer them of some kind and currently:

1. Banks don't have to value their assets at market price (that whole mark to market issue)

and

2. Banks are currently trading below their book value, because, from what I've read, nobody really trusts the value of those assets.

So, it could in theory spark a new global panic by people shorting banks and withdrawing capital.

You're correct about the book value and asset quality being an issue. I don't think a run on banks would be an issue if government orchestrated (especially if not during a crisis). More than likely it would be similar to how AT&T was done previously.

http://en.wikipedia.org/wiki/Breakup_of_AT%26T

You Canadians have it figured out, your banking system seems far more efficient with larger regional institutions.

At this point we need to be more worried about the economic consequences of the next crisis big banks will create. Compared to that danger, I think the breaking the banks one is pretty minimal.

In which case the banking sector is just another crisis waiting to happen. Smash it down, and we'll see just how big they are.

"Too Big To Jail" = venue moved to Court of Public Opinion. Verdict = guilty. Sentence = ?

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