Concern #3: Financial Institutions That Are Too Big to Fail

November 10, 2009

In the darkest days of the financial sector-led recession, deep regret was voiced over and over again that financial institutions must not be allowed to be too large too fail again in the future.  However, the Congress and Obama Administration opted against the most radical suggested reforms like nationalization and separating commercial from investment banking.  Reform proposals do not address the enhanced size of the behemoths in the industry, nor is any effort to address that issue gaining traction.  Anti-trust regulation against banking mergers was a big field in the 1960’s, and when my career at the Fed started over three decades ago, there were many money center banks competing in New York and other big cities. In the buy-or-get-bought banking wars that followed, monopolistic power grew and grew, and the maelstrom of 2007-2009 appears to have left the industry more concentrated than ever.  As in the cases of the U.S. savings rate, Chinese exchange rate policy, and other trade barriers, the half-baked banking reform proposals leave a lot of flash-points for future trouble unrepaired.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.

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