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Big Bank Phobia: Not Too Big to Fail

The median for large-cap banks worldwide is for total assets to equal about 47% GDP, according to Mosby.

Naysayers will rightly point out that U.S. banks' total assets don't include the net fair value of derivatives. If the U.S. large-cap banks' assets were inflated to include the net derivatives, "the top 3 U.S. Banks become the largest in the world," according to Mosby, but would "still represent meaningfully less than the median 47% of their respective annual GDP."

Breaking Them Up Through Brown-Vitter.

That brings us back to "too big to fail" and the question of whether or not to break up the big banks. "The Large Cap Banks have increased their Tier 1 common equity levels from just under $400 billion in 2009 to over $800 billion currently," according to Mosby. Putting it another way, the group has more than doubled its Tier 1 common equity since before the credit crisis.

The Terminating Bailouts for Taxpayer Fairness Act -- with the cute TBTF acronym -- was introduced by Senators Brown and Vitter last month, and the senators minced no words, by saying their proposed capital rules would ensure "that megabanks gamble with their own funds -- not taxpayer dollars."


Considering how important the availability of credit is to U.S. businesses and consumers, that is a rather chilling statement, implying that the banks don't do any of us any good.

Moving beyond the populist rhetoric and the excellent television sound bites, the senators proposed that U.S. regulators "walk away" from the Basel III agreement, which has been signed by the U.S. and 26 other countries representing all major world economies. Rather than following Basel III's risk-based approach to capital requirements, Brown-Vitter would require banks with total assets of more than $500 million would be required to have common equity of at least 15% of total assets.

If Brown-Vitter passes, the big banks, in the words of the senators, "will be faced with a clear choice: either become smaller or raise enough equity to ensure they can weather the next crisis without a bailout."


That last statement is contradicted by recent history: The failures of Bear Stearns, Lehman Brothers and even Washington Mutual were caused by liquidity shortages and not a lack of capital. For Bear Stearns and Lehman, reliance on overnight funding was an immediate problem, causing near instantaneous runs on those companies. This problem, and ways to prevent it, are discussed in part two.

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