Left-right coalition looks outmatched by big banks

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Article Highlights

  • The big banks are bigger than ever, and they're likely to stay big for the foreseeable future. @TPCarney

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  • After the 2008 bailout, banks lost their image as the symbols of capitalism and became symbols of corporatism.

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  • If you're investing in the debt of big banks, it seems your money is safe from market forces for now. @TPCarney

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The big banks are bigger than ever, and despite an eye-catching left-right alliance to break them up, they're likely to stay big for the foreseeable future.

Liberal Sen. Sherrod Brown of Ohio and conservative Sen. David Vitter of Louisiana have hit roadblocks in their push to impose strict, almost punitive requirements on big banks. Banking lobbyists, worried a few weeks ago about a populist wave cracking their government-reinforced hulls, are breathing sighs of relief.

Here's the background:

Anger at megabanks was traditionally limited to the left end of the political spectrum. But in 2008, the Federal Reserve and then Congress bailed out Wall Street, saving a few big banks that would have failed. So banks lost their image as the symbols of capitalism and became the symbols of cronyism and corporatism.

As tea party anger at the bailout barons grew, so did the biggest banks. Goldman Sachs, Bank of America, JPMorgan Chase, Citigroup and Wells Fargo combined, held assets last year equal to 56 percent of the economy, according to the Federal Reserve. That number was 43 percent in 2007.

While size brings with it certain market advantages -- think of the economies of scale Wal-Mart gets for buying in such bulk -- plenty of critics charge that the megabanks' size mostly brings with it political advantages: Once a bank gets big enough, perception grows that the government will bail out its creditors to prevent a broad economic meltdown.

You can see this subsidy in the banks' credit reports. Moody's credit-rating agency, for instance, notes that Bank of America's credit rating benefits from "two notches of uplift ... reflecting Moody's assumptions about the very high likelihood of support from the US government for bondholders or other creditors in the event that such support is required to prevent a default."

If you lend to Bank of America, and it fails, there's a decent chance taxpayers will bail you out. The other big banks get the same two notches of uplift. That means they can borrow for less than they would in a bailout-free world.

Two researchers at the International Monetary Fund concluded that the big banks get a 0.8 percent discount in their interest rate thanks to the presumed bailout. Bloomberg estimated that was worth $83 billion a year to the five biggest banks -- or equal to all the profits of those banks.

Given the government benefits these big banks seem to get, it's no stretch for a conservative to start eyeing ways to break up the big banks. They are the beneficiaries of big government.

This is some of the thinking behind the Brown-Vitter bill, introduced in the Senate in late April. The bill would not directly break up big banks, but it would set a threshold ($500 billion) above which banks would face stricter rules on risk. These megabanks would need to hold in their vaults or at the Federal Reserve assets equal to 15 percent of all their deposits -- a much higher reserve requirement than banks currently face.

Big banks would either have to obey these rules, thus decreasing their ability to put their deposits to work, or break up to avoid these strict reserve requirements.

But Brown-Vitter's prospects are bleak. Some early missteps have hurt the bill's prospects. Brown and Vitter had announced last week they had four Republican co-sponsors, but by the end of the week, they had only two. Did the bank lobby peel off two Republicans, or did Brown and Vitter jump the gun in announcing their co-sponsors. Also, the bill text leaked early. According to one source, the leak came from an industry player Vitter thought would be friendly.

On the House side, the Republican push to rein in big bank subsidies -- led by Rep. Jeb Hensarling -- doesn't include breaking them up.

Bank lobbyists who had worried last month about the left-right coalition against them tell me they are breathing easier these days.

On Wednesday, at a panel I moderated at the American Enterprise Institute, Sen. Ted Kaufman (who in 2010 co-sponsored a bill to break up the big banks) granted that breaking up the big banks probably wouldn't happen any time soon. One problem is that right now, the banking system appears to be working well. "When it goes bad," Kaufman said, "then we'll do something about it."

So, if you're investing in the debt of big banks, it seems your money is safe from market forces for now.

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About the Author


Timothy P.
  • Timothy P. Carney helps direct AEI’s Culture of Competition Project, which examines barriers to competition in all areas of American life, from the economy to the world of ideas. Carney has over a decade of experience as a journalist covering the intersection of politics and economics. His work at AEI focuses on how to reinvigorate a competitive culture in America in which all can reap the benefits of a fair economy.


    Follow Timothy Carney on Twitter.

  • Email: timothy.carney@aei.org

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