Too Big to Fail = Too Big to Exist?

A number of former bank CEOs and bank regulators have said so. Now Federal Reserve governor Daniel Tarullo has joined the ranks of those arguing for a breakup of the biggest U.S. banks.

In a lecture at the University of Pennsylvania Law School, Tarullo pointed out that the top banks enjoy a continued aura of government-guaranteed invulnerability, which gives them a funding advantage and “reinforces the impulse to grow.” To counter this tendency, Congress might consider “specifying an upper bound,” Tarullo said.

The “idea along these lines that seems to have the most promise,” he went on, is a limit on nondeposit liabilities, possibly set at a percentage of U.S. gross domestic product. Such a formula would not only have “the virtue of simplicity,” Tarullo said, but also “the advantage of tying the limitation on growth of financial firms to the growth of the national economy and its capacity to absorb losses, as well as to the extent of a firm’s dependence on funding from sources other than the stable base of deposits…”

Tarullo’s approach, as the Wall Street Journal’s Victoria McGrane observed, “takes direct aim at the biggest U.S. banks, including J.P. Morgan Chase & Co., Bank of America, Goldman Sachs, and Citigroup, “all of which rely heavily” on the kind of funding that Tarullo would limit.

Tarullo is the Fed governor in charge of bank supervision and regulation. McGrane described him as “the highest-ranking regulatory official to call for limiting the size of banks.”

Senator Sherrod Brown (D-Ohio) has introduced legislation that includes a bank-size cap pegged to GDP, as Tarullo proposed.

1 thought on “Too Big to Fail = Too Big to Exist?

  1. Everything I’ve read about Financial Transaction Tax talks in terms of .003 of this, or .0029 of that…meaningless numbers. Let’s keep it simple, but go large!! Let’s charge $100 per trade (And keep in mind, the average size of Interest Rate Derivative contracts was $270 million in 2011) Now let’s see what astonishing totals we can come up with. I thank you in advance for your time.
    The following data is from the 2011 World Federation of Exchanges and is broken down by type of trade, and total annual contracts. The results on the right hand side are if a $100 tax were applied to both the buy and sell sides of each trade: Example
    (1,815 million trades x 2 (for buy and sell sides) x $100 (our little tax) = $370 billion)
    Single Stock Options
    1,815 million………$370 billion

    Stock Index Options
    320 million…………$64 billion

    ETF Options
    1,315 million………..$262 billion

    Stock Index Futures
    736 million…………..$147 billion

    Interest Rate Options
    288 million……………$57 billion

    Interest Rate Futures
    1,246 million……………$249 billion
    Equity Derivatives
    2,382 million…………….$476 billion
    Interest Rate Derivatives
    1,519 million……………. $303 billion
    Total………………….$1,928 Trillion

    Now let’s look at the Over-The-Counter derivatives market, the biggest market in the world.
    In 2011, according to the Depository Trust and Clearing Corporation there were 24 billion trades on the Over-the-Counter market of which half were United States based trades.
    Our equation would look like this:
    12 billion times 2 is 24 billion times $100 = $2,400,000,000,000!
    Total: $4.4 trillion dollars in one year! Don’t you think it’s time for a little austerity on Wall Street?
    Please bear in mind this tax does not impact consumers checking and savings account in any way. With numbers like this we could pay off our National Debt in four years (which I personally believe is the single greatest threat to our nation), the year after that we could fund Social Security for the next 75 years and pay off all student loans!
    Thank you,
    Tim Ryan

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