The Financial Stability Oversight Council Defers To Big Banks

"As required by Section 123 of the Dodd-Frank financial reform legislation, Treasury Secretary Tim Geithner, as chair of the Financial Stability Oversight Council (FSOC), has released an assessment on the costs and benefits of potentially limiting the size of banks and other financial institutions. This report, four-and-a-half pages in a longer “Study of the Effects of Size and Complexity of Financial Institutions on Capital Market Efficiency and Economic Growth”, is represented as a survey of the relevant evidence that should guide policy thinking on this issue.

Mr. Geithner’s team conclude rather vaguely “there are both costs and benefits to limiting bank size”, and consequently “This study will not make recommendations regarding limits on the maximum size of banks, bank holding companies, and other large financial institutions.”

This is an analytically weak report that presents a skewed and incomplete assessment of the evidence. Given that the paper was prepared by some of the country’s top experts, who are well aware of the facts, the only reasonable inference is that our leading relevant officials prefer not to take the Dodd-Frank Act seriously with regard to reducing systemic risk. Instead, on all major points, the Financial Stability Oversight Council is allowing the big banks to prevail – and to pursue whatever global expansion plans they see fit

Given Treasury’s attitude during the financial reform debate of 2009-10, this is not entirely surprising. Still there are three major issues with the substance report that should be considered particularly embarrassing to Mr. Geithner and his colleagues.

First, on whether large banks benefit the broader economy, the authors neglect to mention even the most basic facts regarding the increase in the size of our largest banks in recent years. As a result, the entire discussion of bank size in this report reads as it is completely divorced from current economic and political realities.

The largest six bank holding companies in the US had assets valued at 64 percent of GDP at the end of the third quarter of 2010 (the latest available comprehensive data). The same banks accounted for just less than 55 percent of GDP at the end of 2006 and a mere 17.1 percent of GDP in 1995. (All the numbers in this column are updates from what we presented in 13 Bankers, using the latest revised official sources.)

The assets of Chase Manhattan in 1995 amounted to 4.1 percent of GDP. The assets of JP Morgan Chase, as measured officially, were 14.5 percent of GDP in 2010; if we included their off-balance sheet assets (including derivatives), this total would be substantially higher. There has been a similar increase in all the Big Six Banks.

The balance sheet of Goldman Sachs, for example, increased from 1.3 percent of GDP in 1995 to around 6.2 percent of GDP at the end of last year (based on this week’s report); by the firm’s measure, assets expanded 7 percent from the end of 2009 to the end of 2010..."

at http://baselinescenario.com/2011/01/20/the-financial-stability-oversight-council-defers-to-big-banks/