Today, Federal Reserve Chair Janet Yellen delivered her Semiannual Monetary Policy Report to the Senate Banking Committee where she addressed the many actions that have been taken by regulators to strengthen the financial sector and address “too big to fail.” Chair Yellen’s comments today echo other voices in the debate that there is no denying that a lot has changed for the better since the financial crisis. The Dodd-Frank Act, regulatory reforms, and industry-initiated changes have produced a regulatory foundation that has – and continues to – improve the safety, soundness and transparency of the financial sector, protect consumers and help prevent future crises.
There has been much debate about the size of large financial institutions and subsequent claims by critics that U.S. banks are unnecessarily large, growing disproportionately, and should be forced to shrink. Today, SNL Financial released an analysis showing that the largest U.S. banks are not so large compared to their international peers. The analysis found that there is currently only one U.S. bank in the top 10 globally, and only three in the top 20. The top 4 spots being held by Chinese banks. Through their size, global reach, and diverse product and services lines, large U.S. financial institutions are critical to serving the financial needs of large U.S.-based corporations that employ millions of American, and to which millions of other small businesses across America sell products and services.
Given the importance of the U.S.-China relationship to both nations, as well as to the global economy, U.S. officials should continue to push for greater financial sector modernization and market opening reforms in China, in order to level the playing field for U.S. businesses and consumers... The Engage China Coalition, a group of 12 U.S. financial services trade associations chaired by the Financial Services Forum, described a number of these barriers in a recent a letter to Secretary Lew. Financial services modernization and market-opening reforms in China will help transform China’s economy into a more services-based, consumer-driven economy, which in turn will greatly contribute to greater economic growth and job creation here in America.
The right question for policymakers and voters isn’t “are banks bigger or smaller?” but rather “have we addressed the problem of ‘Too Big to Fail?’ – i.e. the impression that taxpayers will be forced to step in and support certain financial sector firms in a future crisis. The right way to assess whether or not any new law, regulation, or policy is working is to examine the period following enactment and compare it to other periods. Looking at the changes in financial sector concentration in the four years following the passage of the Dodd-Frank Act in 2010, the facts look very different. The largest banks have grown much more slowly than their smaller peers, and therefore have been losing market share, resulting in a less concentrated financial sector.