Breaking Up the Big Banks: Ackermann vs. Hoenig

By Simon Johnson

Josef Ackermann, chief executive of Deutsche Bank and chairman of the Institute of International Finance (an influential group, reflecting the interests of global finance in Washington) is opposed to breaking up big banks. According to the FT, he said,

“The idea that we could run modern, sophisticated, prosperous economies with a population of mid-sized savings banks is totally misguided.”

This is clever rhetoric – aiming to portray proponents of reform as populists with no notion of how a modern economy operates. But the problem is that some leading voices for breaking up banks come from people who are far from being populists, such as the UK authorities (in the news today) and the US’s Thomas Hoenig.

Hoenig is an experienced regulator, who has dealt with many bank failures. He is also currently President of the Kansas City Fed and an articulate voice regarding how banks became so big, why that leads to macroeconomic problems, and how consumers get trampled (answer: credit cards, issued by big banks; p.6). He supports a resolution authority that would help deal with some situations, but also says (p.9):

“To those who say that some firms are too big to fail, I wholeheartedly agree that some are too big. However, these firms can be unwound in a manner that does not cause irreparable harm to our economy and financial system but actually strengthens it for the long run.”

Mr. Hoenig is, if anything, a little too polite. There is no evidence that huge banks, at their current scale, provide any social benefit. When these same banks were much smaller, in dollar terms and as a percent of the economy, the global economy functioned no worse than today.

Mr. Ackermann and his colleagues are pursuing a purely self-serving line. Reasonable centrist opinion is turning against them. Either the big banks need to shrink voluntarily or they will potentially face consequences that they cannot control.

Building on ideas from the Kansas City Fed, the Bank of England, the UK Financial Services Authority, and the European Commission, the consensus is moving towards the view that state-supported banking (i.e., operating through implicit guarantees on Too Big To Fail banks) constitutes an unfair form of protectionism. Financial services in this guise do not currently fall within the remit of the World Trade Organization, but it would be a simple matter to extend its mandate in this direction.

In any reasonable judicial-type process, involving relatively transparent weighing of the evidence, Mr. Ackermann would be most unlikely to prevail.

Comments

[BIG-MONEY:]

WHAT A JOKE THAT CITIBANK IS. Citibank is PATHETIC. Citibank has run to the Fed like little school girls to get help. The former chairman has done great harm to the banking system so he could make a few dimes and donate them to get his name on the building. Mr Weill will soon be out of money so he can not do much more harm. HE HAS BEEN KICKED OFF THE BILLIONAIRES CLUB AT FORBES. CITIBANK is done in 2009.

Nov 03 01:10 PM

[derryl:]

Many commenters have been pointing out that we're barely into the first stages of this financial crisis. First came the desperate bailing out of the sinking ship of finance. Now that the threat of imminent catastrophe is past we are starting to take a cooler look at what caused the crisis and how to ensure the ship is made more seaworthy.

During the early panic phase the money center banks were indeed too big to fail, we had to keep the ship afloat. But now that the ship is floating the consensus is emerging that a main contributor to the severity of the crisis was that the financial system was way too top heavy. The listing of just a couple of the too bigs threatened to capsize the whole boat. The solution is to reduce their height and spread their mass around more evenly. These behemoths are not seaworthy. They need to be broken up and their business spread around more horizontally.

We tried big and in the past 10 years, after Glass-Steagall and other limiting regulations were repealed, we tried too big. We were told that economies of scale enjoyed by too big banks would make our financial ship more seaworthy, not less. They were wrong. They nearly sunk us all. I think we can now safely agree with Mr. Johnson and Mr. Hoenig. "Too Big Has Failed".

Nov 03 03:34 PM

[ValueInvestor:]

I find big banks laughable. They say their size allows them to offer better rates and be more competitive. Well, just look at the rates (mortgage, interest, fees) credit unions and smaller regional banks offer and you'll see the big guys are raping the man in the street.

The too big to fail mantra is getting old.

Nov 04 01:29 PM

[TinyTim:]

Thanks for the well supported article.
I especially appreciate the arguments against Too Small To Compete, which is the only reasonable objection to a bank busting policy.
The only real issue now is how to escape regulatory capture and get it done.

Nov 05 06:35 PM