Yesterday the two American agencies that supervise the big banks jointly issued a strong warning on the situation of some large systemic banks: the findings were serious on five of them (Bank of America, Bank of New York Mellon, JP Morgan Chase, State Street and Wells Fargo); their resolution plans in the event of bankruptcy are not adequate to prevent a new intervention by the State or by the taxpayer. Inadequacies were reported by the FDIC (Federal Deposit insurance Corp.) and the Federal Reserve Board respectively on the plans of Goldman Sachs and Morgan Stanley, while Citigroup was asked to address some weaknesses identified by both supervisors. These "systemic" banks (with total assets of at least 50 billion dollars) will have to be fully regulated by October 1st.
This fact brings to the fore the problem of "Too-Big-To-Fail" or the moral hazard that excessive size facilitates since profits are maximized by focusing on high-risk businesses counting on public bailouts in the event of failure. It is worth remembering that in the aftermath of the previous great crisis, produced by the moral hazards of the big banks, the idea seemed to prevail that they should "make an adjustment by becoming smaller, simpler and safer" (2009 Report of the Bank of International, p. 134). None of this has happened and the powerful lobbies of the interested parties have shifted the emphasis on capital endowment, knowing full well that there is no capital that can hold up in the face of a new major crisis. It is known that small banks encounter fewer problems in recapitalizing themselves in the event of a crisis, if only because of the small size of the possible problem. This is confirmed by the capitalization parameters collected regularly by Mediobanca (Major Italian companies, summaries of banks by category). In 2014, the highest share of equity on total assets was that of 16,4% recorded by the small BCCs, i.e. those banks that one would like to grow until they become an elusive banking "third pole".
As usual, the European authorities are making the wrong policy and are asking for dimensional strengthening and mergers. In America, according to what the New York Times informs us today, there are instead presidential candidates, such as Senator Bernie Sanders, who are intelligently calling for a break-up of the major banks. Let's hope they hold on because this Titanic comeback dance isn't all that exciting in the face of already negative economic forecasts.
