My colleague Margie Fernandez flagged a research report from Oppenheimer on the ongoing Basel implementation. It has been calculated, through various methodologies, that the implementation of both Basel III and Dodd-Frank may be “upwards of 15% of operating profits of small banks.” Now it should be noted that these figures were derived from a meeting with Frank Keating, former governor of Oklahoma and now the president of the American Bankers Association. No doubt there should be grains of salt and awareness of the potential for bias here regarding who he works for. However, even with that in mind, this is pretty much operational standard for the post-crisis period.
From the moment Bear Stearns failed there has been a noticeable proclivity in policy actions to favor size and scale. That flies directly in the face of public proclamations about ending too big to fail, but nothing has been actually proposed (or even floated) to do so. The reason is so very simple.
The entire premise of bank regulation post-2007 has been bigger is better. It is difficult to bailout 1,000 smaller banks, particularly to figure out even what they are doing/have done. Far easier to only deal with 8 central banks and maybe 20 interconnected global behemoths – a centralized system for a centralized regime. Free markets, including that for money and credit, is inherently messy (which is actually a strength; rigidity is frailty).
From the Fed’s perspective, which means countenancing no wrong in its own actions, the failure of liquidity measures in 2008 were exactly this. The Fed created a number of programs to “push” liquidity out into the banking world, only to be “stymied” by fragmentation. The big primary dealers did not “share” their status, and thus liquidity prefecture, with smaller players. In liquidity terms, monetary policy supposedly failed because of plumbing issues (solvency is another discussion entirely, or whether liquidity alone was enough – I highly doubt it).
Is the answer, then, to simply get rid of the potential for fragmentation by getting rid of small banks? It seems to me that the opposite approach, reducing the footprint of primary dealers, would be far more effective at targeting the problem while maintaining competitive pressure. And that answers the question as to why policy is not moving in that direction. Competition means failure, and, in the monetary and banking realm, failure is not allowed. Those that have attained a banking charter and their current status will be protected by politics from any innovation and antagonism.
This was only briefly mentioned in 2008 with the idea, so it seemed, that eventually concentration would be specifically addressed.
MR. FISHER. Mr. Chairman, this may be a conversation for another day, but it seems to me that we’re ending up with more and more concentration—Bank of America, Citicorp, Morgan—and I’m curious as to what we plan longer term so as not to displace the ability of other institutions to play their role in the financial markets and grow their businesses—the super-regionals that are healthy and so on.
It appears that Fisher’s concern has indeed been handled, very quietly, only in that “displacement of ability” is not the Fed’s concern (as if it ever was outside of these highly infrequent allusions and interjections). The answer to the concentration problem appears to be that it is not a problem at all, and thus making super-regionals more expensive to operate is just incidental. In a command system, all that matters is preserving the functions of command. The rest is just conversation for socialists as they misidentify capitalism.
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