Tags: IMF | Economist | Banks | big

Former IMF Economist: Break Up the Big Banks

By    |   Friday, 23 Dec 2011 12:13 PM

Vast amounts of power and risk concentrated in megabanks nearly destroyed our economy in 2008, yet the megabanks are now bigger than ever and concentrate even more risk, warns Simon Johnson, former chief economist at the International Monetary Fund, in an article for The New York Times.

Their precarious situations, in addition to their power, are hindering regulators from pursuing financial fraud investigations and enforcement actions against them, Johnson asserts.

This odd combination of political power and financial weakness is essentially putting them above the law.
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Some government officials, like New York State Attorney General Eric Schneiderman, are investigating megabanks, but the Obama administration has dragged its feet, probably because Secretary of Treasury Timothy Geithner remains worried about the financial system's stability.

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President Barack Obama
(Getty Images photo)
Plus, Johnson says, President Barack Obama is reluctant to confront the megabanks because of their large campaign contributions.

If we really hold them accountable, the too-big-to-fail megabanks will collapse and probably take the entire financial system with them. Instead, we should break them up.

The six largest banks had balance sheets equaling about 55 percent of GDP in 2006, but now their assets equal almost 62.5 percent of GDP, Johnson said, in testimony to Congress.

And, despite new regulations, top megabank executives have incentives to take on huge risks by borrowing large sums relative to their equity.

Seen as too-big-to-fail, the megabanks have an implicit government guarantee so can borrower more cheaply than other banks, which allows them to become even bigger.

New rules give large banks tougher capital level requirements but don't directly limit their size, notes The Washington Post. And credit rating agencies, business partners and others give them preferential treatment, giving them a competitive advantage that more than makes up for larger capital levels.

"Debt holders of major financial institutions have an expectation that the government will shield them from losses and, as a result, they do not accurately price risk,” wrote Syracuse University Professor Joseph Warburton and Deniz Anginer, a researcher with the World Bank.

"This expectation of public support constitutes a subsidy to large financial institutions, lowering their funding cost," they wrote in the research quoted by the Post.

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Vast amounts of power and risk concentrated in megabanks nearly destroyed our economy in 2008, yet the megabanks are now bigger than ever and concentrate even more risk, warns Simon Johnson, former chief economist at the International Monetary Fund, in an article for The...
IMF,Economist,Banks,big
1810
2011-13-23
Friday, 23 Dec 2011 12:13 PM
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