A handful of banks are “too big to fail.” The government must prevent these banks from failing to prevent economic chaos. Therefore, deposits at the largest banks are essentially guaranteed to be safe by the taxpayers. Smaller banks don’t get that guarantee.
Large depositors are given the choice every day of placing their money in a bank where their funds are fully guaranteed, or a bank where only a fraction of their deposits are guaranteed. Can we blame the large depositors for choosing fully insured deposits over partially insured deposits? I can’t. That insurance is valuable. Large depositors are willing to accept lower interest rates at “too big to fail” banks in order to get the extra protection. The “too big to fail” banks are given the subsidy of free insurance, which lowers their cost of capital.
By continuing “too big to fail” protection, the government is skewing the competitive landscape in favor of the largest banks.
The result of the subsidy should not be a surprise. The big banks keep getting bigger, making their potential failure an even bigger threat. According to an article in the American Banker, assets at the top six banks “rose from $6.41 trillion in 2009 to $7.22 trillion in 2014—a total increase of $800 billion. The top six banks are also responsible for more than half of the $2 trillion increase in total U.S. banking assets in the years since 2009.” Four banks control 45 percent of the country’s banking industry.
Banks aren’t perfect. Sometimes, they make loans or investments that fail. At some point, one of these large institutions will fail. Now is the time to decide who should have to pay for their bad investments.
The great thing about elections is that it creates an opportunity to debate the issues. Bernie Sanders says the top six banks should be broken up. If there is no bank that is too big to fail, then the taxpayer doesn’t have to pay for the failure. Every other candidate in both parties wants to continue the taxpayer subsidy of large banks.
In the movie Philadelphia, Denzel Washington’s character kept saying, “Explain it to me like I’m a 4 year old.” Help me here. Allowing banks to remain “too big to fail” creates a perpetual subsidy from taxpayers to the equity holders the largest banks in the world. If the government is going to hand out subsidies, is that the group that needs it most? Why is it considered radical, far left, liberal, or socialist to want to end that subsidy? Why isn’t that just plain old support for a level playing field and a free market that works for all people? Help me. I don’t get it. Explain it to me like I’m a 4 year old.