Four years ago today, President Obama signed the Dodd-Frank financial reform act into law. It was passed through the then-Democratically controlled House and Senate on a wave of frustration–even anger–at Wall Street and the federal government’s bailout of the megabanks. The political rallying cry was to end “Too Big To Fail” forever.
Four years later, the verdict is in: “Too Big To Fail” is alive and well. Dodd-Frank certainly hasn’t ended it; in many ways, it’s institutionalized it. And by any metric, megabanks are more dominant and more favored in a market more tilted in their favor than ever before.
The six megabanks (Bank of America, Citigroup, JP Morgan Chase, Goldman Sachs, Morgan Stanley, and Wells Fargo), who now control almost 50 percent of the banking assets in the United States, have grown by almost $800 billion since the financial crisis. Further, just over the last year, the four biggest banks in the United States (Bank of America, Wells Fargo, Citigroup, and JP Morgan Chase) total assets have grown by nearly $200 billion, resulting in total assets worth more than $8.1 trillion.
This growth of concentration in the banking market, of course, has been a long-term trend for some time. But as the metrics above suggest, Dodd-Frank has accelerated that trend, making it more rapid and dangerous.
Dodd-Frank actually establishes a permanent mechanism for government help for large failed banks. And it formally designates the largest as “systemically important financial institutions”–SIFIs as they’re known, or the “Too Big To Fail” club.
Of course, this isn’t lost on investors and the market in general. Because it is generally recognized that these megabanks will not be allowed to fail, many large entities have moved even more of their holdings and business to them. In addition, this perception allows megabanks to access capital in the market at significantly cheaper rates. So government policy has created a distinct megabank advantage or subsidy.
To date, at least 15 different, independent studies have shown that such a government policy-created advantage or subsidy exists. The International Monetary Fund estimated the 2012 subsidy at up to $70 billion in the United States. Bloomberg View estimated this subsidy is as much as $83 billion per year.
At the end of last year, the Government Accountability Office (GAO) produced the first part of a report that I specifically requested along with my Democratic Banking Committee colleague, Senator Sherrod Brown of Ohio. It concluded that banks and bank holding companies with assets over $50 billion were the predominate beneficiaries of taxpayer- funded bailouts from the Federal Reserve during the crisis. It also proved that these megabanks relied more heavily on short-term funding markets compared to smaller so-called community banks.
In addition to helping create this “Too Big To Fail” subsidy, Dodd-Frank created a huge avalanche of very costly over-regulation. Most banks I visit have had to grow their compliance departments by well over 100%. This has created vastly increased costs for these institutions. While this affects banks of all sizes, it has been far more threatening–even crippling–to smaller institutions. It has clearly helped fuel the current surge of consolidations.
Soaring compliance costs are killing smaller banks and a government policy-created subsidy is favoring megabanks. No wonder the banking market is getting more consolidated, and at an accelerating pace.
I believe we should adopt a fundamentally different approach focused on simpler, more targeted and systemic reforms. Sen. Sherrod Brown (D-Ohio) and I have introduced legislation that does this–the Terminating Bailouts for Taxpayer Fairness (TBTF) Act. It evens the playing field and better protects the taxpayer from failures and the bailouts that would follow by increasing the minimum amount of capital megabanks are required to have. It also gives smaller, community banks some significant regulatory relief (an area in which I would have preferred to go much further for banks of all sizes).
The GAO will be releasing the second part of its report this month, and I anticipate that it will bolster what Sen. Brown and I, along with others, have been saying: “Too Big To Fail” is alive and well. Unfortunately, that’s likely the biggest legacy of Dodd-Frank.
But four years later, we still have the opportunity to correct course. By focusing on simpler, more targeted and systemic reforms like increased capital standards, we can create much greater protection against future bank failures and the taxpayer-funded bailouts that would follow. We can truly end “Too Big To Fail” once and for all.
Vitter is Louisiana’s junior senator, serving since 2005. He sits on the Banking, Housing and Urban Affairs; the Armed Services; the Commerce, Science and Transportation; the Environment and Public Works; and the Small Business and Entrepreneurship committees. This piece originally appeared at The Hill.