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JPMorgan earnings show 'too big to fail' banks getting bigger

JPMorgan Chase's surging earnings show that many of the biggest US banks are becoming more powerful. What happens if they get in trouble again?

By Staff writer / October 14, 2009

In this Oct. 1 file photo, a Chase bank branch is shown in New York. JPMorgan Chase & Co. reported strong third quarter earnings Wednesday, Oct. 14.

Mark Lennihan/AP

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Big financial firms are emerging from crisis even larger and more powerful than they were before.

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It's a trend punctuated by surging earnings reported Wednesday by JPMorgan Chase, the largest US bank, and it poses a challenge for US policymakers.

The question is: How can regulators reduce the risk of another financial crisis should these banks get into trouble again. In other words, if they were too big to fail then, they would seem to be even more so now.

In addition to questions about maintaining financial stability, this issue also includes risks for the vibrancy of the US banking system, on which the whole economy depends. Some finance experts say that the efficient flow of credit is at risk as more power becomes concentrated in the largest hands.

A sign of progress?

In some ways, it's a sign of progress that such concerns exist.

The largest banks are no longer teetering on the brink of failure, as some appeared to be earlier this year. And the strongest ones are doing even better than expected. That banking recovery has helped to buoy confidence that a broader rebound in the economy is getting under way.

But it's also a sign that the longstanding "too big to fail" challenge has grown even bigger.

"There is definitely an increased concentration [of market power] in the industry," says Brian Bethune, chief financial economist at IHS Global Insight in Lexington, Mass. "Indeed, the 'too big to fail' situation has gotten worse."

JPMorgan's numbers

JPMorgan Chase wowed investors Wednesday by reporting $3.6 billion in profits for the year's third quarter, up from $527 million in the same quarter a year before. In stock market value, JP Morgan now tops the list of large US banks.

It has roared out of recession so mightily that, unlike most banks, it's market value is larger today than before the crisis.
JPMorgan is widely viewed as the best managed of the megabanks, but the pattern goes beyond the self-styled "fortress" built by CEO Jamie Dimon.

Consider 18 of the largest financial firms within the Standard & Poor's 500 index.

Before the financial crisis, in May 2007, these firms accounted for about 55 percent of the market value of financial firms within the S&P 500. Smaller banks and insurance firms accounted for the other 45 percent, according to numbers crunched earlier this year by Bespoke Investment Group.

Today, those 18 firms account for nearly two-thirds of the financial-sector market value in the index, according to numbers from S&P and the Yahoo! Finance website.

Many of these large firms contributed to nation's recession by taking big risks that helped to pave the way for panic on Wall Street last fall.