Financial Services Forum President and CEO Rob Nichols recently authored an op-ed featured in The Dallas Morning News that discussed the economic value of large financial institutions and why they shouldn’t be broken up. The full op-ed is below:
Rob Nichols: U.S. can’t afford to break up big banks
Published: 28 January 2013 10:13 PM
Recently, Dallas Federal Reserve President Richard Fisher gave a speech in which he asserted that large banking companies are still protected from failure and market discipline and, therefore, must be broken up. Fisher and other breakup proponents overlook major provisions of the Dodd-Frank Wall Street Reform Act that effectively end the problem of “too big to fail,” as well significant action taken by large banks that has dramatically strengthened the U.S. financial system. He also ignores the economic consequences associated with breaking up large banking companies.
The Dodd-Frank Act, signed by President Barack Obama in 2010, tackles “too big to fail” head on. First, it significantly reduces the likelihood of bank failures by imposing much stronger supervisory requirements on large institutions, including much higher levels of capital and liquidity. Additionally, large banks must now submit to regulators “living wills” — detailed blueprints for how they can be broken apart without damaging the economy or involving taxpayers.
Second, the law gives regulators the authority and legal framework, which did not exist during the recent crisis, to close failing institutions in an orderly way. Thus, large institutions are no longer immune from failure, and U.S. taxpayers are no longer on the hook for banks’ mistakes.
Even before Dodd-Frank, large banks began taking major steps to reduce risk. For example, capital — which serves as a cushion against unexpected losses — has doubled to near-record levels. Holdings of cash and liquid securities have also doubled, better positioning banks to respond swiftly to crises. Asset quality is far stronger, with problem loans declining to their lowest levels since 2008. Risk management tools and internal controls have been strengthened. Pay practices now closely align the personal incentives of bank employees with the long-term performance and health of the bank. The net result is a far stronger, less risky banking system — one in which depositors, customers and taxpayers can be confident.
Despite these changes, Fisher insists that large banks are still somehow protected from market discipline. This assertion is demonstrably false. During the 2008 crisis, before Dodd-Frank, the stock prices of large banks plummeted, as panicked shareholders frantically sold. Similarly, counterparties — other financial institutions doing business with large banks — fearing large losses, stopped lending to many large banks. In the Dodd-Frank era, even banks’ creditors have been put on notice by the FDIC that they, too, are subject to losses.
It is also important to keep in mind that large banking institutions provide unique and significant value that smaller banks simply cannot provide — in the sheer size of credits they can deliver, the wide array of products and services they offer, and in their geographic reach. These capabilities are particularly important to globally active corporations, which employ about 20 percent of U.S. workers. Breaking up large banking companies would only send the business of corporations like AT&T, Texas Instruments and Southwest Airlines overseas.
Large, globally active institutions also help make foreign markets more modern, liquid and efficient, expanding trade flows and opening new markets to U.S.-produced goods and services — all of which supports economic growth and job creation here at home.
An economy of the size, complexity and diversity of ours needs financial institutions of all sizes, business models and market strategies — from community banks like Veritex Community Bank and Grand Bank of Texas, to asset managers like Westwood Holdings Group and Smith Asset Management Group, to large diversified banks like Goldman Sachs and Bank of America. To be sure, large institutions haven’t always been perfect and aren’t without risk. But congressional, regulatory and industry-initiated action since 2009 has dramatically strengthened the financial system and created a credible framework that ends “too big to fail.”
America should build on this progress by allowing financial institutions of all sizes to do what they do best — provide the capital and financial products and services that American businesses of all sizes and variety need to grow, create wealth and create jobs.
That’s a goal Richard Fisher should welcome.
The Financial Services Forum is a non-partisan financial and economic policy organization comprising the CEOs of 19 of the largest and most diversified financial services institutions doing business in the United States.
The purpose of the Forum is to pursue policies that encourage savings and investment, promote an open and competitive global marketplace, and ensure the opportunity of people everywhere to participate fully and productively in the 21st-century global economy.
Welcome to ForumBlog. This is where our policy team analyzes the latest proposals, ideas, and news surrounding financial sector regulatory reform, trade, and the economy. Our goal is to provide thoughtful insights on the issues impacting the intersection of Wall Street and Washington, as we pursue policies that encourage savings and investment, promote an open and competitive global marketplace, and ensure the opportunity of people everywhere to participate fully and productively in the 21st-century global economy.