One Bank, Indivisible
Government decisions are making America into a nation of big banks, and only big banks.
In mid-March, in response to a global financial panic, Swiss regulators forced UBS, a huge Swiss Bank, to purchase Credit Suisse, another huge Swiss Bank. This action created just one huge Swiss bank, with no serious competitors. It’s not good for a nation that prides itself on its financial system to have just one massive bank, with no market forces to keep it nimble. Unfortunately, the United States is heading in the same direction.
Credit Suisse had been troubled for a while, but it finally fell victim to the fears sweeping the financial system this spring. As Europe and America have hiked interest rates to slow inflation, banks around the world have racked up big losses. The trillions of dollars’ worth of long-term debt they hold—all loans and bonds paying lower interest rates—is now worth less because debt, loans, and bonds issued today command the current higher interest rates. This loss in value comes just as the banks must pay those higher interest rates to keep their depositors’ cash. Investors can never know exactly what banks hold on their books until a crisis occurs, but they figure that only the best-run banks can handle this massive upheaval. Credit Suisse, which had fallen victim to outright fraud several times in the past few years, wasn’t the best-run bank; the collapse came after the bank admitted “material weaknesses” in its financial controls. That’s fine; banks fail from time to time, and a Swiss Bank should have been able to fail and restructure itself under new shareholders and managers.
Instead of letting Credit Suisse fail, though, Switzerland followed the same strategy that American and European officials deployed 15 years ago, during the global financial crisis: force supposedly strong financial institutions to gobble up weak ones. Back then, JPMorgan Chase bought the investment bank Bear Stearns and the commercial bank Washington Mutual. Bank of America bought Countrywide Financial and Merrill Lynch. Wells Fargo bought Wachovia Bank. And so on.
These forced mergers did not quell the panic. The panic arose not because banks weren’t big enough but because they weren’t solvent enough to withstand tens of billions of dollars in defaults on unwisely issued mortgage debt. In forcing big banks to swallow smaller ones, the government didn’t reduce risk; it just agglomerated it. The only thing that stopped a mass exodus from the financial system in the fall of 2008 was Western governments’ explicit and full guarantees of their entire banking systems.
The 2008 mergers did, however, make a preexisting problem worse: the “too big to fail” phenomenon, which had caused the 2008 crisis in the first place. Well before the financial crisis, beginning in the 1980s, federal officials had made it clear that they wouldn’t allow a large financial firm to go bankrupt, with only its small, FDIC-insured depositors protected from losses. Unsurprisingly, subsidizing big banks with this implicit guarantee created ever-bigger banks, with ever-looser lending standards. The government similarly implicitly guaranteed much of the residential-mortgage market. With no market discipline over either mortgage-related bonds or the banks that invested in them, the 2008 financial collapse was inevitable.
After 2008, the government tried to negate its actions with words. Yes, the government had created financial firms that were too big to fail; and yes, the government had made such firms even bigger after 2008; and yes, the government had backstopped those tottering firms with explicit taxpayer and central-bank guarantees. But the government promised solemnly it would never do so again, under any circumstances. The Dodd–Frank financial-regulation law, with its strict oversight of large financial firms and its outright prohibition of 2008-style bailouts, would ensure it. As then-President Barack Obama said in signing the law in 2010, the measure “put a stop to taxpayer bailouts once and for all.”
The U.S. still hasn’t had a full-power test of Dodd–Frank, so we don’t know for sure what would happen if global investors pulled their money out of a large bank, such as JPMorgan Chase or Citigroup, en masse. Would regulators let investors in these institutions’ billions of dollars’ worth of corporate bonds and uninsured deposits bear losses?
But we have some clues. First, keep in mind that the nation’s biggest banks have only grown bigger over the past decade and a half. They did so not just because the government made it clear 15 years ago that bigger was better but also because they have benefited from near-zero interest rates since then. In 2020, to prevent a Covid-shutdown recession, the Federal Reserve pumped trillions of dollars into the country’s financial system. With no productive place for that money to go, people put it in the bank. In early 2020, the nation’s total bank deposits were $13.3 trillion; by the middle of last year, they reached a peak of $18.1 trillion, growing more than a third. In 2007, America’s big five banks held $2 trillion in domestic deposits, or 30 percent of the market share. By late 2022, the top five—now JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, and U.S. Bank—held nearly $6.6 trillion, or almost 37 percent of the market share. JPMorgan Chase alone more than quadrupled its deposit base.
Second, consider the Swiss example. In forcing UBS to buy Credit Suisse, the Swiss government actually forced investors in some $17 billion in junior bonds to bear full losses. So far, so good. But this result didn’t ensue because the Swiss were firmly in favor of market discipline. It was because the Swiss government wanted to protect shareholders, preserving at least some value for stock owners, even though they’re generally supposed to bear losses before bondholders. Why do that? Because the shareholders are important people: the Qatari and Saudi governments, whose wealthy denizens are also lucrative Swiss-bank clients. So the global standard, at least as set by the Swiss, is a continuation of the 2008 playbook: decisions based on geopolitical considerations, not market principles, resulting in too-big-to-fail institutions getting even bigger.
Of course, we might not do as the Swiss are doing, should our own major crisis arise. So far, though, that seems to be the road we’re on. The third clue came two weeks ago, after the collapse of Silicon Valley Bank and Signature Bank. With uninsured depositors (people with more than $250,000 in a single institution) withdrawing their money in droves, federal regulators stepped in to protect all depositors, not just small ones. In doing so, they protected large corporations that had recklessly held hundreds of millions of dollars in a single bank. This week, Treasury Secretary Janet Yellen made it clear that she would offer the same guarantee to other banks, should “similar actions . . . be warranted” to "protect the broader U.S. banking system.”
If the federal government is going to guarantee the full deposits of mid-ranked banks, as Yellen has made clear it will, then it will guarantee the full deposits of all banks. If Silicon Valley Bank, with its $161.5 billion in domestic deposits as of late 2022, and Signature Bank, with its $88.6 billion in such deposits, were too important to fail, then it’s an excellent bet that JPMorgan Chase, with its $2 trillion in domestic deposits, is probably too big to fail. If midsize banks are too big to fail, and big banks are too big to fail, then small banks—those institutions with just a few local branches—operate at a terrible competitive disadvantage.
Guaranteeing all bank deposits is a blow against free markets in another way: it obliterates the market for corporate bonds in financial institutions. Why would anyone buy a bond in a midsize or big bank, taking a risk of loss in return for a modest interest rate, when he could simply deposit his money at the same bank, taking no risk at all? JPMorgan Chase’s bonds yield between 2 percent and 6 percent in interest each year, depending on maturity; bank CDs, which are effectively deposits, offer similar rates, now with a government guarantee. The bank bond market is, or was, critical to market discipline; riskier institutions have paid more to borrow via bond markets.
Just to drive home the point that this is our new reality: the big banks recently embarked on a rescue mission of their own. Last week, the country’s top 11 banks infused $30 billion of their own deposits into First Republic Bank, another struggling midsize bank dependent on large, uninsured deposits. That’s awfully nice of them—except that it now means the federal government can never let First Republic fail. To do so would be to risk tens of billions of dollars in losses at the biggest banks, thus risking system-wide panic.
In a way, Obama was right. The government ended bailout incidents by creating one big, permanent bailout regime. Large banks such as JPMorgan Chase are now effectively branches of the U.S. government. After the 2008 financial crisis, they served the government’s long-term policy—near-zero interest rates—to keep the party of unsustainable household debt going. Now the government will make sure that they don’t bear devastating losses from the unwinding of that policy.
Photo by Michael M. Santiago/Getty Images
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