Too Big to Fail: Is it Over?

Sep 27, 2018Banks & Credit Unions, News

Ten years ago, the American economy suffered one of the worst recessions in U.S. history. Thousands of businesses closed up shop, and millions of people were left unemployed. At the time, billions of dollars were poured into big banks that were deemed “Too Big to Fail” (TBTF) – banks so big, that a collapse could crash the entire economy. Although new policies were put in place to mitigate “TBTF” after the Recession, many financial experts believe the problem still persists.

Big banks are bigger now than ever before. Over the past 10 years, the three largest U.S. banks – J.P. Morgan Chase, Bank of America, and Wells Fargo – have added more than $2.4 trillion in domestic deposits, a 180% increase from pre-Recession levels. These three banks hold 32% of the country’s deposits, compared to holding only 20% in 2007. In particular, J.P. Morgan Chase has doubled in size, and Bank of America’s assets have increased by half.

Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, believes TBTF is still a very real problem. “The Federal Reserve Bank of Minneapolis spent the past two years analyzing how much risk large banks still pose to the U.S. economy — and what we can do about it,” Kashkari wrote in a March op-ed for The Washington Post. “Our conclusion is that the largest banks are still too big to fail, and if we were to face another crisis, the taxpayers would again be on the hook.”

Daniel Tarullo, a former Federal Reserve Governor, echoed similar thoughts to Kashkari this past Wednesday on a podcast with Politico. “We are certainly a lot safer now than we were ten or 12 years ago. The largest institutions are substantially better capitalized; they have much more sustainable funding patterns,” said Tarullo. “But for all of that, I think there is still some legitimate question among people as to whether if one of them got into significant trouble — and if one does the others will probably be at least under some stress — whether there still wouldn’t be a view that they are too big to fail and that the government should take extraordinary measures.”

Although most experts believe TBTF still exist, there is less agreement on what to do about it. A new report by the Congressional Research Service released Monday titled, “Systemically Important or ‘Too Big to Fail’ Financial Institutions,” provides a detailed review of the debate surrounding TBTF, although refraining from providing a specific recommendation on what to do about TBTF.

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