Abstract
ABSTRACTMore than ten years after the global financial crisis, what has happened to the ‘too-big-to-fail’ (TBTF) banks whose reckless behavior was among its preconditions, but which received public support and guarantees in the midst of that crisis? Insofar as this too-big-to-fail status helped create the crisis and then imposed costs on the rest of society, we would expect these banks to have shrunk. We investigate the evolution of 31 global-TBTF banks and find that their overall size has hardly recorded any substantial change. However, there is no sense of urgency in the flourishing post-crisis literature on TBTF banks about the need to contain their size; the prevalent view therein is that if properly regulated, the risks that arise from a financial system dominated by TBTF banks are manageable. This view rests on the same overly narrow theoretical underpinnings whose flaws were exposed in the crisis. We argue that too-big-to-fail banking is embedded in a set of self-reinforcing policies—consolidation, balance-sheet support through quantitative easing, favorable regulations, bank lobbying, and geo-economic and geo-political considerations—which explain why these banks have not shrunk and why they remain a threat to financial stability, well after the lessons of the crisis should have been learned.
Highlights
If one could journey back in time to late 2008 and ask people what changes were needed in the financial system, the shrinking of the largest financial institutions that had brought the global economic system to the brink of collapse would be on the top of the list
This paper examines whether megabanks have shrunk postcrisis, focusing on 31 banks classified as global systemically important by the Financial Stability Board (FSB 2017, 2018)
We have attempted to frame an answer to the question of why this global megabanking sector— a sector comprised of institutions whose very scale, complexity, interconnectedness, and risk-tolerance have already proven to be a toxic mix—is still so large and powerful ten years after the global financial crisis
Summary
If one could journey back in time to late 2008 and ask people what changes were needed in the financial system, the shrinking of the largest financial institutions that had brought the global economic system to the brink of collapse would be on the top of the list. We find that some shifts in size related to strategic adjustments have occurred amongst this sample of banks; but taken as a whole, the change in size is negligible, with aggregate figures still accounting for disproportionately large shares of GDP This leads to a further question: what explains the post-crisis persistence of too-big-to-fail (TBTF) banking, and what risks does it pose?. We do so via a political economy prism that links post-crisis micro level developments (banking consolidations) to the macro level (quantitative easing monetary policies and regulation), the issue of power (bank lobbying), and geo-economic and geo-political structures (the unique role of the US dollar and of global finance in the world economy) This effort at bringing these multi-level, multi-site aspects of TBTF banks into one analytical framework is necessarily exploratory, an initial analysis of the forces at play. As Johnson and Kwak (2010, p. 164) put it, ‘never before has so much taxpayer money been dedicated to save an industry from the consequences of its own mistakes’
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