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Report criticizes ‘too-big-to-fail’ banks

By Marcie Geffner · Bankrate.com
Tuesday, June 25, 2013
Posted: 4 pm ET

The Independent Community Bankers of America,  a Washington, D.C., trade organization that represents regional and local banks, has recently released a report arguing that large banks should have their wings clipped.

The report, "End too-big-to-fail," examines how large financial institutions affect the U.S. economy, argues that megabanks shouldn't be allowed to be as large as they are and explains ICBA-supported federal legislation to address the organization's claim.

In a statement, ICBA President and CEO Camden R. Fine said, "As we outline in the report, too-big-to-fail distorts free markets, incentivizes risky behavior, holds taxpayers hostage to bailouts, and creates unfair competitive advantages for the largest banks. But there is perhaps no greater reminder of the too-big-to-fail impact than the constant, oppressive regulatory burdens that community banks face on a daily basis."

Here are some points made in the report.

  • Megabanks have become larger since the financial crisis. The 12 largest U.S. banks now hold nearly 70 percent of banking assets.
  • These banks "court risks that no smaller firm would tolerate and act with impunity."
  • Low interest rates, subsidized by an implicit taxpayer guarantee, create a competitive imbalance that allows large banks to compete unfairly and grow even larger.
  • The banking industry is becoming more concentrated and will continue to contract as long as megabanks exist. The bigger and more complex these banks become, the more damage would be caused if they failed.

In a Wall Street Journal letter to the editor, Frank Keating, president of the American Bankers Association,  a Washington, D.C.-based trade group that represents banks, said dismantling the largest U.S. banks was not an appropriate solution to concerns about too-big-to-fail financial institutions and would be "detrimental to the still-recovering economy."

Keating also put the issue in an international context, saying that making U.S. banks smaller would imperil the U.S. standing in the world financial markets.

"The top 10 U.S. banks today employ 1.1 million people, routinely deliver innovations that make managing money safer and more convenient and provide critical services to U.S.-based multinational companies that in turn employ millions. How can dismantling them be better for us than stating, unequivocally, that Uncle Sam won't rescue those that fail?" Keating asked.

Follow me on Twitter: @marciegeff.

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