With banks making record profits and the people frustrated by low interest rates on deposits and lack of lending, a nation's leader is speaking out: "Let me be frank. Our banks earn profit too easily. Why? Because a small number of large banks have a monopoly."
Those comments came not from President Obama, Tim Geithner, Ben Bernanke or any other U.S. policymaker; instead, Chinese Premier Wen Jiabao made them during a broadcast on China's state-run National Radio.
Obviously there are differences between the banking systems in the U.S. and China, where the biggest banks really do have a monopoly, as prescribed by the state.
But there are a lot of similarities too, including:
- A concentration of assets among a small handful of huge banks.
- Huge support from the federal government, either directly or indirectly.
- Frustration among citizens at low returns on savings and lack of credit availability, despite huge profits for the banks and big payouts for bank execs.
- Concern about banks' growing political clout and the related issue of regulatory "capture," i.e. when regulators work to serve the banks' interest rather than protect the safety and soundness of the system.
If you start the clock with Bear Stearns' near failure and Fed-engineered take-under by JPMorgan in March 2008, it's been over four years since the financial crisis started in earnest and took the global economy to the brink of collapse. After Lehman Brothers' bankruptcy caused chaos in the financial markets, most big banks only survived thanks only to trillions of dollars of taxpayer bailouts and support from the Fed and other central banks.
During this period, the big banks got even bigger as regulators forced mergers in order to prevent more bank collapses: Today, the five-largest U.S. banks control 52% of the industry's assets, up from 26% in the early 1990s, according to the Dallas Fed.
Bank profits have rebounded sharply since the depth of the crisis, thanks largely to the Fed's aggressive actions, most notably quantitative easing and its zero interest rate policy. The Fed has enabled banks to offload their most toxic securities and generate risk-free profits by borrowing at zero and earning returns of about 2% on 10-year Treasuries. (After being bailed out by the government, banks are now essentially being given money by the Fed in order to lend it back to the government; this is a relationship so convoluted and perverse, it makes Peter borrowing to pay Paul look like child's play.)
As bank balance sheets recovered and profits grew, so too did payouts for banking executives, who can't seem to figure out why ordinary Americans -- faced with stagnant wages if they're lucky enough to have a job -- hate them so much or why the Occupy Wall Street movement became a global phenomenon.
As Henry and I discuss in the accompanying video, breaking up the big banks may not be the answer: It's not clear how big is 'too big', and size itself may not be the problem. (See: 'Too Big to Fail': Breaking Up Big Banks Is NOT the Answer, Former Regulator Says)
But concentration of assets among a handful of banks does pose grave risk to the financial system and, thus, the broader economy. The concept of banks being "too big to fail" is anathema to market capitalism, and apparently even China's state-run version.
The good news here, potentially, is the conversation over breaking up big banks is happening again, on a global stage -- and we're not in an acute crisis. It's a long shot, but perhaps global policymakers will address this before the next crisis hits, not during or after. It's a possibility, but don't hold your breath.