By Simon Johnson
Earlier this week, Richard Fisher – President of the Dallas Federal Reserve Bank – captured the growing political mood with regard to very large banks: “I believe that too-big-to-fail banks are too-dangerous-to-permit.” Market-forces don’t work with the biggest banks at their current sizes; they have great political power and receive almost unlimited implicit subsidies in the form of protection against downside risks – particularly in situations like now, with the European financial situation looking precarious.
“Downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the appropriate policy response. Then, creative destruction can work its wonders in the financial sector, just as it does elsewhere in our economy.”
Mr. Fisher is an experienced public official – and also someone with a great deal of experience in financial markets, including running his own funds-management firm. I increasingly meet leading figures in the financial sector who share Mr. Fisher’s views, at least in private.
What then is the case in favor of keeping mega-banks at their current scale? Vague claims are sometimes made, but there is very little hard evidence and often a lack of candor on that side of the argument. So it is refreshing to see Vikram Pandit, CEO of Citigroup, go on the record with The Banker magazine to at least explain how his bank will generate shareholder value. (The interview is behind a paywall, unfortunately). Continue reading