Breaking Up The Too Big to Fails Will NOT Harm America’s Ability to Compete with Foreign Banks

Washington’s Blog
Sunday, Nov 1st, 2009

I have previously debunked numerous false arguments used to defend the too big to fails. See this and this.

But the apologists for the TBTFs are now arguing that breaking up
the beached whales … er, giant banks … will harm
America’s ability to compete with foreign banks.

Joshua Rosner (managing director of an independent financial services research firm), has written an important essay debunking this argument:

Those who argue against a more proactive reduction in
risk and size of TBTF institutions will, as always, revert to an
argument that strikes a natural chord in every American’s heart:
‘Doing so would create an unleveled international playing field
for our institutions relative to their international
competitors’. Level playing fields are a worthy goal, but this is
not a relevant argument. Instead, this tired bromide must be
resoundingly dismissed on several counts:

• Those countries with the largest banks as a percentage of GDP
  (Iceland, Ireland, Switzerland) demonstrated that a concentration of
  banking power can cause significant sovereign risk and tilt global
  economic playing fields away from that country.

• The likely breakups of ING, Lloyds and KBC suggest that it is we
  who seek to support an unlevel playing field where we subsidize our
  TBTF banks while other nations recognize the policy failures of moral
  hazard. If we continue down this path we will likely be at risk of
  violating international fair trade regimes.

• When the “unlevel playing field” argument is cited,
  keep in mind this reasoning supports the disadvantaging of 8000+
  community banks relative to our largest banks, all in the name of
  protecting big banks from governmentally- subsidized international
  competition.

• There is no longer any evidence that, beyond a cost of capital
  advantage that comes with implied government support, there are
  sustainable and tangible economies of scale arising from being the
  largest. The financial supermarket concept has been proven a failure.
  The only ones who benefit are the high-level executives.

• We must demand that our legislators no longer allow unelected
  officials at the independent Federal Reserve to sign international
  accords created by the TBTF banks through supra-national bodies like
  the Basel Committee.

• Are we to believe that if we did not have such large and globally
  dominant firms, US borrowers might be paying more that the 29% interest
  that several of the TBTF firms are now charging on their card accounts?
  Perhaps we should think about what advantage our population has gained
  as a result of our financial institutions being such a large part of
  our economy or being globally dominant.

• Since when did we accept a national strategy of following rather
  than leading? When we do what is right, others follow. As example,
  consider the bank secrecy havens – they made money for a bit.
  Now, even the Swiss and the Cayman authorities are coming around to our
  view.

• We are already at a disadvantage given that the largest foreign
  banks operate in the US without any tier one capital requirement and
  yet mostlarge foreign banks have not built a bricks and mortar presence
  here. Nobody screams about their undercapitalization nor has that
  undercapitalization caused deposits to migrate to foreign banks.

That
breaking up the giants and letting small and mid-sized banks, credit
unions and state public banks compete fairly will shift the
Earth’s gravitational field as deposits shift away from the money
centers?

Rosner’s actual language is somewhat over-the-top:

If leadership won’t add such language
[reigning in the TBTFs], call your elected official and ask how much
they actually receive when they agree to put on the kneepads.