November 16, 2015—Major banks are quick to denounce any efforts to reduce their size and influence by claiming that staying big is a competitive advantage. The pro-crony capitalist big bank argument often involves claims that keeping them big and powerful helps them to cut costs to customers, making them more competitive and beneficial to the little guy.
Reducing their size, they often argue, could weaken the United States’ position in the global financial arena.
But according to an investigation carried out by the Bloomberg’s editorial board, the largest US banks aren’t profitable at all. Instead, they survive because US taxpayers pick up the bill.
From Bloomberg View:
“So what if we told you that, by our calculations, the largest U.S. banks aren’t really profitable at all? What if the billions of dollars they allegedly earn for their shareholders were almost entirely a gift from U.S. taxpayers? … The top five banks — JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. — account for $64 billion of the total subsidy, an amount roughly equal to their typical annual profits (see tables for data on individual banks). In other words, the banks occupying the commanding heights of the U.S. financial industry — with almost $9 trillion in assets, more than half the size of the U.S. economy — would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders.”
According to the report, big banks understand that “too big to fail” is a great reason to stay big. Government bailouts are a certainty to major banks making disastrous mistakes. Staying large makes them “essential,” forcing government officials to agree with anything they need to stay afloat.
One of the consequences of the “too big to fail” phenomenon is that creditors allow banks to borrow at lower rates. That kind of deal accounts for borrowing costs that are 0.8 percent lower than they would be if creditors didn’t have the bailout certainty in mind. While 0.8 percent may sound too low, it costs taxpayers $83 billion each year. That’s the equivalent of giving banks about 3 cents of every tax dollar collected by the government.
The 0.8 percent subsidy was first assessed by researchers Kenichi Ueda of the International Monetary Fund and Beatrice Weder di Mauro of the University of Mainz. According to Bloomberg, this discount applies to big banks’ liabilities, including customer deposits and bonds.
In order to keep the subsidy in place, these major banks spend hundreds of millions of dollars each year on lobbying efforts. That’s an important part of what they do, since spending big bucks on politicians and their campaigns helps them to remain unopposed in Congress.
To Bloomberg’s editorial board, the result is “a bloated financial sector and recurring credit gluts.” Over time, this issue will result in a financial disaster that might require bailouts that “exceed the government’s resources.” Without being able to act, the Treasury won’t be as quick to come to the rescue of financial institutions the way it did in 2008 and 2009. That might cause the financial industry to collapse and everyone who relies on them will lose a lot in the process.
While Bloomberg’s editorial board did a great job covering the consequences of this subsidy, it failed to mention something of great importance: this type of crony capitalist scheme, in the end, is what will destroy the country’s financial health.
Too bad folks in main street will be blaming capitalism for the damage instead.
Do you believe Congress should leave their financial ties with the industry behind to tackle this issue and put an end to this subsidy? Share your thoughts with us!