One of the major flaws with the financial reform bill that passed the House last week is that it does nothing to stop behemoth banks from growing even bigger.
This problem has gone largely unnoticed in the press, but not by the New York Times. In the clearest signal yet that the Times editorial board is starting to “get it,” today they pressed the Senate to go a step further than the House and “explore more direct measures, like banning banks beyond a certain size, measured by their liabilities."
The Times is borrowing an idea from Simon Johnson, the former chief economist at the International Monetary Fund – who has called for a well-defined cap on how big large banks can grow before they pose a threat to economic stability. Johnson has called for a size cap on a bank’s liabilities expressed as a percentage of GDP. By some estimates Bank of America’s liabilities exceed 14% of GDP. Johnson thinks no bank should have liabilities bigger than 2% of GDP.
The biggest and the most dominant banks in the U.S. economy are at the heart of the financial crisis. After a wave of deregulation in the 1990s, the largest banks grew massively by taking on greater risk, charging higher consumer fees, developing new exotic financial activities and new kinds of mergers and acquisitions The 2008 financial crisis triggered a new round of mergers and marriages and the result is that the topvfour banks now hold around 50% of all depository assets and 95% of all derivatives in this country.
A cap on size would not only help to keep bailouts at bay, it would help to create greater competition in the financial industry and make banks less politically dominant.
As the U.S. Senate takes up financial service regulation, reformers will be focusing on a number of key issues: a clearly-defined cap on the size of banks, the re-institution of Glass-Steagall protections that separate boring commercial banking from exotic risk-taking, the closing of all loopholes on derivatives, and the passage of a Consumer Financial Protection Agency.
The New York Times was right to put the spotlight on a key piece of unfinished business. Today's editorial concludes, "If we have learned anything over the last couple of years, it is that banks that are too big to fail pose too much of a risk to the economy. Any serious effort to reform the financial system must ensure that no such banks exist.” We couldn't have said it better ourselves.