The “TBTF” Banks Are Threatening the Global Economy Again – Here’s What You Need to Know
May 4th, 2016 | By Shah Gilani
The United States and global economic powers increasingly rely on big banks to facilitate government borrowing, fund commercial and consumer loans, underwrite economic growth, and act as originators, principals, and agents in capital markets.
Now that reliance increasingly looks to be the cause of lackluster global growth.
Today, we’ll look at the size of big-banks, their structural issues, and how the need to “socialize” their losses, because of their size, fundamentally retards economic growth.
Then, on Friday, we’ll examine last quarter’s earnings for the biggest banks in the country, and I’ll show you exactly why the big banks are headed for big trouble, and how they could drag the entire global economy down with them.
Size Matters
Big banks aren’t just big – they’re gigantic. And, for the most part, they’re getting bigger all the time.
In spite of huge losses incurred as a result of the 2008 banking crisis, and the often overlooked fact that most of the biggest banks in the United States and Europe were technically insolvent at the height of the crisis, big American banks have gotten bigger.
From the fourth quarter of 2007 through the fourth quarter of 2015, three of the four largest deposit-taking commercial banks in the United States dramatically increased their assets. Assets on a bank’s balance sheet are loans and obligations they hope to earn interest income or fees on.
According to Federal Reserve reports, JPMorgan Chase & Co. (NYSE:JPM) increased its assets by 51%. Bank of America Corp. (NYSE:BAC) increased its assets by 25%. And Wells Fargo & Co. (NYSE:WFC) increased its assets 211%. Citigroup Inc. (NYSE:C), over those eight years, shrunk its asset book 21%.
Acquisitions during the crisis powered asset increases. JPMorgan acquired Bear Stearns on April 1, 2008, and Washington Mutual on September 26, 2008. Bank of America acquired Countrywide Financial on July 1, 2008, and Merrill Lynch on September 14, 2008. Wells Fargo acquired Wachovia Bank on October 3, 2008.
Giant European banks, having slimmed down since the crisis, due to government rescues, nonetheless acquired insolvent banks across Europe during the crisis.
The net effect of giant Dutch bank ABN-AMRO being carved up with almost half going to Royal Bank of Scotland, and Britain’s HBOS being partially sold to giant U.K. bank Lloyd’s TSB, was that the British government had to take over both Royal Bank of Scotland and Lloyd’s on October 13, 2008.
During and after the crisis, hundreds of small banks went out of business across the U.S. and Europe, and huge banks like UBS and Anglo Irish Bank were taken over by the likes of the Swiss National Bank, the Federal Administration of Switzerland, and the Government of the Republic of Ireland.
Still, none of the giant banks in the U.S. or Europe were flat-out liquidated. Most of the big household name banks are still intact, having seemingly survived on their own. Some were absorbed by larger institutions and some were bailed-out by their home governments and are ongoing banking concerns today.
Saving big banks, as opposed to liquidating failed enterprises and morally corrupt institutions, or breaking them up, institutionalizes moral hazard, “a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost.”
And the defacto doctrine that bigger banks are better institutionalizes:
Too big to fail (TBTF) Too big to jail
Too big to control
Too big for the greater good of the economy and free markets
U.S., European, and Asian banks, especially giant Chinese banks, while too big to fail, can still become insolvent, making the world’s reliance on them as underwriters of economic growth a clear and present danger to economic growth.
Below is a list of the largest banks in the world as of year-end 2015, by assets:
Click for Full Text!
Poster Comment:
Jefferson was right about the banks.