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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?

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How did this shift happen?

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The big getting bigger

Experts point to three major developments:

1. The very largest firms got the most assistance from the federal government, because they were the ones that posed the greatest risk to the economy when they were in trouble. The government money gave investors the perception that these banks had the biggest backstop behind them.

2. The megabanks are more diversified than smaller banks. Where regional or community banks focus more narrowly on lending, JP Morgan and others have been able to offset their mortgage or credit-card challenges by posting strong profits in other ventures such as bond trading, Mr. Bethune says.

3. In many cases, regulators brokered mergers so that at-risk firms could avoid federal receivership. Bear Stearns and Washington Mutual were folded into JP Morgan, for instance. Wachovia joined Wells Fargo. Merrill Lynch and Countrywide Financial merged with Bank of America.

The actions arguably helped to resolve the crisis, but they made some of the too-big firms even larger. The exception is Citigroup, once the largest US bank. It couldn't merge with anyone else and has been trying to becoming healthier by selling some divisions.

One sign of market concentration: A handful of the largest banks have been granted waivers to hold more than 10 percent of all US banking deposits, something not ordinarily allowed, according to an August report in the Washington Post.

Is this a good thing?

This sets up a dilemma for policymakers. Many finance experts say the complex global economy needs some very large banks – and that what's needed is to prevent future crises by regulating them better. Others say a way must be found so that failing firms in the future can be allowed to fail, regardless of their size. Such a tough-love approach, they argue, will help to ratchet down the risk of financial crises.

One likely tactic is to treat the largest banks differently. They could be required to maintain a larger-than-average ratio of capital to assets at risk, for example.

A few prominent economists have argued much more should be done.

Simon Johnson, a former chief economist at the International Monetary Fund, told a congressional hearing earlier this year that the power of large banks should be curbed. One way, he said, might be to use antitrust laws already on the books.

It's a controversial case to make, since the US has about 8,000 banks. But the large ones are gaining power, while the number of smaller banks has been declining steadily. Mr. Johnson argued that the economic growth would be stronger if there were more competition in the banking industry.

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