Big financial firms are emerging from crisis even larger and more powerful than they were before.
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 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.
How did this shift happen?
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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