Earlier this week I critiqued a financial reform analysis from the folks at Hamilton Place Strategies, a high-powered communications and public policy firm in Washington. The report pushed back against the idea that the US needs to break up or cap the size of its biggest banks. In my view, the study, while raising many pertinent issues, did not in the end prove its case. I still think the argument that the government-subsidized industry needs to be restructured so that it allows market forces and moral hazard to work is a winning one.
Simon Johnson, former IMF chief economist, liked it even less and highlights research and anecdotal evidence supporting his case (some of which I also cited):
1. Research by the Bank of England’s Andrew Haldane “which finds no economies of scale and scope for the world’s largest financial institutions.”
2. Research by Richard Fisher and Harvey Rosenblum of the Dallas Fed, “who explain clearly how megabanks weaken the effectiveness of monetary policy and undermine United States influence over all aspects of our financial system.”
3. Research by Professor Admati and Martin Hellwig in their new book, The Bankers’ New Clothes, which disputes “bank equity capital is now sufficient to withstand future adverse shocks.”
4. Research from International Monetary Fund, the Bank of England and other sources cited that finds government support allows megabanks to borrow more cheaply than smaller institutions.
5. Johnson also notes that many key financial industry players think Too Big To Fail is alive and well in the Dodd-Frank era:
Even William Dudley, the former Goldman Sachs executive who now heads the Federal Reserve Bank of New York, acknowledges that too-big-to-fail and its associated subsidies continue. Daniel Tarullo, the lead Fed governor for financial regulation, is in the same place.
Hamilton Place Strategies contends that large banks can be resolved – taken through liquidation by the F.D.I.C. without difficulties – and that the “living wills” process helps to provide a meaningful road map. I talk to people closely involved with these issues, officials and private-sector participants (as a member of the F.D.I.C.’s Systemic Resolution Advisory Committee and as a member of the Systemic Risk Council, led by Sheila Bair, the former chairwoman of the F.D.I.C.).
Hamilton Place Strategies also asserts that global megabanks are an essential part of a well-functioning international economy. Again, I don’t know where this comes from. As part of my work at the Massachusetts Institute of Technology and at the Peterson Institute, I talk with people who run companies, large and small, operating around the world; they emphasize that they need financial services provided by well-run institutions and markets that have integrity.
Real financial reform based on market capitalism not crony capitalism is a sleeper issue that may be getting ready to wake up.