Big Banks Getting Bigger is Not Good for US

US does not only mean the United States, but also means us taxpayers around the world, and this headline has a true meaning because it is true for both of US!

JP Morgan just got to buy Republic First Bank at the request of the American government that wanted to have the cheapest way of saving the bank that was effectively bankrupt. JP Morgan has a massive balance sheet USD 3.7 trillion. If you consider that the US government has borrowed around a USD 24 trillion, and their GDP is around USD 25 trillion, then you will understand that JPMorgan is a very important bank for the USA. It is so big that Mr. Dimon, their CEO, has 250 00 people working for him. Furthermore, you can be pretty sure that there is plenty going on inside the bank about which he does not have a clue. Nobody can oversee such a massive organisation and know what is happening. He can only hope that the processes work and that he has delegated things to the right people. But banking is no easy activity and governments around the world have said remarkably openly that these massive banks are too big to fail – thus implying that JP Morgan management is not thought of being infallible, even though top officials probably pray that he is! The taxpayers will always be paying the costs of big bank failures… and things are getting worse all the time because bank consolidation has been the biggest thing in banking for the last 50 to 60 years. If Mr. Dimon cannot honestly know, how can regulators know what is going on in some dark corner!

The question raised here is that we should not be allowing banks to grow so big because big bank failures are common, big banks cannot be controlled to behave all the time, and taxpayers always have to cover most of the losses while shareholders take most all the profits!

Your correspondent has been in banking for almost 6 decades and has seen banks grow and wither. During this short period of history, I have seen some of the world’s largest banks have a habit of dying – Citibank was once the world’s largest and now its stock prices is withering like some dried-out daisy. I can remember how one of its former CEOs travelled the world in a private jet before they became popular for the rest of us! A few years after his departure, the US government had to bailout the bank in 2008. Likewise, another of the world’s largest banks, the Royal Bank of Scotland, had to be taken over by the UK government in 2008 to save it from bankruptcy! Then we have Credit Suisse, a Swiss giant, SVB and First Republic saved by government intervention these last few weeks…

There are just too many examples of banks in trouble that I have witnessed during these 56 years – you will recall SKOP, the Finnish Savings Bank, and many other small Finnish savings and cooperative banks that landed in trouble. Kansallis Osakepankki (KOP) and SYP had to be merged because of huge losses in their real estate and lending portfolios. The same stories have been seen in Denmark, Norway and Sweden. The lists of failed banks is so long that it is impossible to miss – the internet is full of such lists. The following banks come to mind during the last few minutes: Bear Sterns, LTCB, Deutsche Bank, Commerce Bank, Hessische Landesbank, Westdeutsche Landesbank, Dillon Read, Dexia Bank… and many more but there is not enough space here…, Spanish banks, French banks, other German banks, Italian banks, British banks, Japanese banks, Canadian banks, there number runs into hundreds of banks…

Now we are being told that consolidation and tighter regulation means that the sun is shining but I believe that this is far from true for the following reasons:

  1. Regulators and politicians use the saying that they must support big banks that end up in trouble because “they are too big to fail”. That is a terrible argument because it almost always leads to moral hazard where we privatize the profits and socialize the losses. Banks should fail and the shareholders should bear the losses like any other company.
  2. Big banks are too big to understand and control. I believe that it is impossible for any big bank’s CEO, board, auditor or regulator to understand what is going on in any big bank. JP Morgan now has a balance sheet of some USD 3.7 trillion with a staff of 250 000 people! The complexity of managing this supertanker is impossibly difficult and nobody can be sure where the next bomb will explode, and JP Morgan has had plenty in the past. All of them are depending on cloud computer systems from Amazon, Google, Apple and Microsoft. One can only speculate guess what will happen next…
  3. Banks are not individual and unconnected ships in a large ocean, but part of a tightly integrated and complex network of banks and financial inter-dependence across many different countries in complex digital networks. Accidents happen where you least expect… Who was able to forecast Citibank’s demise, RBC, SVB or Credit Suisse?
    The whole sector is littered with overpaid and bloody bodies of dumped CEO’s and boards.

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