Corporate welfare for Too-Big-To-Fail banks

When the vice chairman of the FDIC is concerned about the subsidies going to the too-big-to-fail banks and calls it corporate welfare, you know something is wrong.

The generous federal insurance gives the large banks an advantage. The extra-large unlimited insurance that ran until last December multiplied the advantage. Their too-big-to-fail status means they can take more risks that otherwise. They need not fear heavy enforcement action because the U.S. Attorney General has said what many previously realized – enforcement action against them would create market turmoil.  The combination of retail and commercial banking means the deposit insurance is subsidizing them taking positions in the market.

Those issues and more are outlined in Mr. Thomas Hoenig’s article in the Washington Post – Stop subsidizing Wall Street.

He uses the analogy of federal subsidizing of the fuel cost for the nation’s largest airlines. That would put the small regional carriers at a serious disadvantage.

He explains:

Financial firms can borrow money — their equivalent of fuel — more cheaply and with less market scrutiny when they have access to government guarantees of deposit insurance, loans from the Federal Reserve and, ultimately, taxpayer support such as we saw with the Troubled Assets Relief Program in 2008. 

Banks keep the upside payoff but the taxpayers carry the downside risk:

This form of corporate welfare allows the protected giants — those “too big to fail” — to profit when their subsidized bets pay off, while the safety net acts as a buffer when they lose, shifting much of the cost to the public. 

That encourages risky behavior for which we will pay the price.

The most basic change he suggests is moving the trading activity outside the coverage of insured deposits.

That would be a superb start.

Leave a Comment

Your email address will not be published.