Like your humble blogger, Mr. Stephens prefers to take steps now to prevent the next disaster rather than rely on the provisions of the Dodd-Frank Act to a) be implemented and b) to work when disaster strikes.
As of this past January, any bank operating in the United States with more than $50 billion in assets must have the business equivalent of a living will—plans for what to do in the event of catastrophe....
But the fact that the Dodd-Frank financial regulations require the largest banks to submit detailed plans for worst-case scenarios suggests something is seriously amiss.
We all know what happened when the "too big to fail" banks teetered on the verge of collapse in 2008. The government stepped in with $700 billion of taxpayer money, justified by the notion that failed banks would destroy our economy.... Three years later, we have Dodd-Frank's complex regulations and banks that are bigger than ever.
The solution isn't to demand that the big banks plan for disaster—it's to take steps to prevent disaster....
I haven't always felt this way. I doubt anyone has been a more consistent supporter of interstate and national banking than our family and Stephens Inc. have been. In the 1970s and '80s, we owned 4.9% equity ownership positions (and in the case of Worthen Bank much more) in numerous institutions in anticipation of interstate mergers that eventually did take place.
That support was based on the regional financial crises that affected banks in different parts of the country at different times. In the 1970s, the Southeast banks were particularly hard hit by declining real-estate prices. The '80s saw Texas and Southwest banks devastated by the drop in oil prices and subsequent real-estate decline. The Northeast and California also went through economic declines that were contained in their respective regions.
All of this strengthened the thesis that national banks would be in a better position to withstand the regional economic declines, particularly as they related to real estate.
The thesis was wrong.
As we all know now, banks that are national in scope are no more immune to financial and capital problems than regional banks.As the financial crisis showed, banks that are international in scope are no more immune to financial and capital problems than national or regional banks.
The question is why?
Regular readers know that the answer is because of opacity in the disclosures made by banks. As the Bank of England's Andrew Haldane says, banks are 'black boxes'.
The only market participants with access to all the useful, relevant information on a bank in an appropriate, timely manner are the financial regulators. The market is dependent on them to properly assess this data and to communicate this assessment.
As the Nyberg Report on the Irish financial crisis documented, there are a variety of reasons why even if regulators properly assess this data it will not be communicated to the market.
This is the reason why banks must be required to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposure details. Disclosing this data ends the financial system's dependence on a single point of failure, the regulators, who, by design, are more likely to fail than not.
In the 1930s, this type of disclosure was common place as it was the sign of a bank that could stand on its own two feet.
Since then, there have been no laws passed that restrict banks ability to make this type of disclosure (yes, I am aware of borrower privacy laws, but the data that needs to be disclosed does not have to violate these laws).
The regional bank failures of the 1970s and '80s had a significant impact on the investors in those institutions, but they did not cause a national financial crisis.
The reason is simple: The banks were not so large that the banking system, the FDIC and other agencies could not deal with them.
Today we see the opposite. Five institutions control 50% of the deposits in this country. They are definitely too big to fail.And governments have already shown that the will bail them out.
In a capitalist economy, there should be no such entity. We should promote competition and innovation in the financial industry, not protect an oligopoly. We need to place limits on banks and cushion the economy against future shocks.
Specifically, I propose we do the following....Mr. Stephens would require government and the financial regulators to adopt size limitations and break-up the Too Big to Fail banks.
I prefer simply requiring ultra transparency. When market participants see what is on and off these banks balance sheets, they will adjust both the amount and price of their exposure accordingly. This will put significant pressure on the TBTF to implement their living will and shrink themselves.
Please note that Mr. Stephens also champions a couple of the key elements from the blueprint for saving the financial system.
• Retain the $250,000 limit on deposit insurance indefinitely. Raising the amount to $250,000 from $100,000 as part of the Emergency Economic Stabilization Act of 2008 was the proper course of action because it reassured bank customers. It should not revert to $100,000 at the end of 2013 as currently prescribed by law.
• No more bailouts. Stockholders and creditors need to know that they are on their own. The government will not again rescue banks whose imminent demise is of their own doing....
Until real reform occurs, we face the danger of another crippling banking crisis.