- Treasury Assistance Comes at High Price For GM
- Busch: What Obama Won't Say Tonight
- Predictions 2010: The Big Picture
- Predictions 2010: Analyst Tony Fratto
- Predictions 2010: Analyst Vince Farrell
- Predictions 2010: Analyst Tony Crescenzi
- Predictions 2010: Analyst Andy Busch
- Schork Oil Outlook: What's Worth Fighting For
- Farrell: Forget About Dubai—Worry About This
- Roginsky: The Botax Whose Time Has Come
MOST SHARED
- Keeping America Great
- Cisco Has 84% of Tandberg, Won't Extend Bid
- Kohlberg Kravis Bidding for Morgan Stanley's CICC Stake
- GE, Comcast Complete Deal Over NBC Universal: Source
- Australia Regulator Opposes Caltex-Exxon Deal
- Case Closed but Woods Scrutiny Continues
- UK Economy Turned, Inflation to Spike: BoE Economist
- Toyota Takes Lead Position in Canada in November
- Unemployment to Peak at 10.5%: Moody's Economist
- 8 Stocks to Gain on Obama's Afghan Plan: Analysts
- BofA On Proposed Changes In The Housing Bailout Program
- The Future of The Media Landscape
- November Auto Sales Muddle Along
- Busch: What Obama Won't Say Tonight
- Stick with Equities—Avoid Emerging Markets: Laszlo Birinyi
- Pfizer Chomps On A Carrot
- Predictions 2010: Technology
- 'Black Swan' Shuns Public Life Because of Bernanke
- Look Ahead: Markets Count Down to US Jobs Report
- FHA to Toughen Mortgage Rules in Lenders Crackdown
- Obama to Send More Troops; Seeks Afghanistan Exit
- GM Removes CEO Henderson; Whitacre Is Interim Chief
- UK Economy Turned, Inflation to Spike: BoE Economist
- Who Were the Biggest Winners And Losers This Year?
- GE, Comcast Complete Deal Over NBC Universal: Source
- Case Closed but Woods Scrutiny Continues
RSS FEED
CNBC Guest Blog
Text Size 
 |
It is impossible for top management to effectively monitor what is happening in all the nooks and crannies which have proven themselves able to bring down the largest Goliaths. And the Boards of Directors? Too friendly, too close, not independent enough, chosen as “buddies” rather than for skills needed. They have for the large part failed to perform. Chris (“I still can’t find my Countrywide mortgage documents”) Dodd’s wife serves on many boards. Her consulting company has NO clients. Just one of many many possible examples of inappropriate Board appointments.
The president of one of the largest banks (still on government guarantee life support) recently said he was ready to start growing the bank. Whoa there! The costs of “Too Big To Fail” have become abundantly clear (and they keep piling up).
But what are the benefits?
Are there really economies of scale or a better diversification of risk or more investment opportunities not available to smaller banks (regional banks for example)? What did shareholders and customers of these mega banks get as a payoff from their scale and scope? It is not clear what the gains might be beyond what a well run regional-size bank might produce.
But the cost to taxpayers and savers is clear!
Assuming my assertion is correct, there are a number of changes that the FDIC might want to consider. (1) insurance premiums could be applied to total assets since it is the quality of these assets that puts deposits at risk. Even for large banks that might fund only 25% of their assets with domestic deposits (the rest with uninsured foreign deposits and bank debt), the quality of those assets put the domestic deposits at risk; (2) insurance premiums that rise with the size of the bank, since “systemic risk” does rise with size and complexity; (3) insurance premiums that rise with the complexity of the assets (their liquidity). Complexity reduces liquidity which raises the exposure of the FDIC insurance fund to make deposits good in the event of a failure; (4) insurance premiums that rise with leverage on and off the balance sheet (maybe no off-balance sheet assets?).
If these suggested policy changes look like they might discourage the creation of huge banks with high leverage and complex financial products, you got the message.
Until we can be convinced that having the “largest bank in the world” is good for the average saver, consumer and small business, smaller, better run, more customer oriented banks might better serve our economic interest.
Check Out These Special Reports On CNBC.com
- Slideshow: Biggest Holders of US Gov't Debt
- Slideshow: Companies at Greatest Risk for Default
- Slideshow: What Does $1 Trillion Look Like?
- Slideshow: How Your Tax Dollars Are Spent
- CNBC.com Guest Blogs
___________________
William Dunkelberg is an Economics Professor at Temple University.
Data is a real-time snapshot *Data is delayed at least 15 minutes