Vice Chair Janet L. Yellen - Confirmation Hearing
A few days ago, Vice Chair Janet L. Yellen made a very
telling statement at her confirmation hearing before the Senate Committee on
Banking, Housing, and Urban Affairs.
Overall, she is saying all the right things and will probably be
confirmed, but I am bothered some by her remarks regarding bank stress
testing. Mrs. Yellen actually believes
that the bank stress tests (with their minimum requirement of tier 1 capital)
are sufficient to avoid or weather another financial disaster.
Given the general consensus over the last two years about
the danger of having our banks be “too big to fail,” it is both surprising and
disappointing that the current stress tests being suggested would allow our
banking system to remain more or less intact; meaning, too big to fail. Is no one willing to address this elephant in
the halls of Congress? If five banks
controlling 80% of the market does not constitute a “too big to fail”
situation, I’m not sure what would.
It seems that our political and financial leaders are living
a lie, but the American taxpayers are the only ones paying for it. The
amount of tier 1 capital a bank has is irrelevant when it comes to a global or
even national financial collapse of our banking system and capital
markets. The only relevance is the size
of the institution and how far-reaching the impact of their collapse would be
(as in the case of AIG) on the American people.
If these institutions were smaller, the financial and economic impact on
the overall economy would be much easier to mitigate.
Mrs. Yellen also thinks, mistakenly, that Basel III is going
to prevent or avoid bank failures. Basel
III is definitely a genuine improvement from Basel II, but many banks are not
prepared to meet the new tier 1 capital requirements that Basel III
demands. This being the case, many banks
will be, if they are not doing so already, seeking merger opportunities or sale
in 2014. But no amount of tier 1
capital, let alone the amount required under Basel III, will allow any bank
from meeting a financial Tsunami head on.
I believe that there are two indicators that prove that
banks are too big and must be broken up.
The first is the newly-released CRA report, which will be discussed in a
future blog post a couple of days from now.
The second is the aforementioned Basel III, which, though cumbersome, is
worth the read. Though well-intended, it
lays out a mind-boggling amount of financial scenarios that must be taken into
account when deciding the “too big to fail” question. It amazes me that the simplest, most
cost-effective way to protect individual Americans from bank failures seems to
elude the policy wonks at the federal government. Put it into law that total bank assets shall
be capped at 5 billion dollars, and move on.
I am not sure of what the cap should be but allowing a bank to grow to
such a size that it eliminates competition and controls market pricing is
wrong.
With a hard cap of 3 to 5 billion, it will allow more banks
to enter the market to compete for consumers searching for a place to park
their money and to obtain loans. In
time, the current bank oligopoly will be broken up, and risk will be spread
more widely than the small handful of large banks we now have. When the next calamity hits (not if, but when), some banks might go, but there will be enough still left
standing to pad the fall of the American, and global, economy.
Mrs. Yellen is right in saying we have come a long way, but
with a 3 trillion dollar deficit, 7.3% unemployment, 7 to 8 million loans in
default and the real possibility of the US defaulting as the debt ceiling is
rapidly approaching, I think anything that can happen will happen.
As consumers we need more competition among banks, which
will lead to lower fees and interest rates.
It will also create more jobs and better lending practices, as banks
will be forced to really work in the communities they serve. Instead of being focused on being the biggest
bank in the world, banks should focus on serving local communities, and the
families and small businesses that eventually become big businesses. Entrepreneurial success stories, after all,
are what make this country great.
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