If you're interested in the 2008 global financial crisis you've probably come across the term too big to fail, refering to certain banks and other economic institutions within an economy which would have catastrophic effects on the economy should they fail and therefore have an implicit or excplicit guarantee from the government that they will be rescued should they run in to serious problems. This of course produces moral hazard which is why it seen to be so harmful to have banks which are too big to fail. For those who aren't familiar with the term 'moral hazard' ot refers to actors taking on more risk when insured as compared to before they were insured, or as Paul Krugman put it moral hazard is " any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly."
When is a bank or other financial institution too big to fail? The easy answer is of course when a collapse would cause a crisis for the entire economy, of course this means that there is no exact size limit but rather it depends on the economy in which the bank is operating. In the case of America there are a few banks which could potentially be too big to fail. According to CNBC the five largest banks in the US owned 45% of the total assets in the industry in 2015. These banks are, in order of size from smallest to largest, US Bank, Citibank, Wells Fargo, Bank of America, and finally JPMorgan Chase. In 2014 these five controlled just under $7 trillion out of the industry total of around $15 trillion. The important point here is that the other six and a half thousand other banks in the US own a bit over half the assets. US bank is the smallest of the giants by a long short with close to $400 billion and JPMorgan Chase is the biggest with $500 billion more than the next biggest.
While these statistics certainly sound enormous it's hard to understand how much it really is. I find it helps to put it in to perspective so let's start by comparing US bank to a state. US bank's total assets are worth the value of every good and service produced in Nigeria in a year. JPMorgan Chase's total assets are pretty close to being worth the same as every good and service produced in Italy in a year.
The point with this piece is to show that America has a problem with banks that are too big to fail, I for one at least doubt the federal government could afford not to bail out JPMorgan Chase, and that it would be a benefit to the US to use antitrust regulation to cut the big five banks down to a manageable size. I'm disappointed in the federal government that it refuses to deal with such a pressing and important issue. This is especially true given the current monetary policy climate with many central banks engaging in quantitative easing whereby interest rates are set low to encourage inflation to rise to target levels which result in a lack of safe assets with decent returns which incentivices actors in financial markets to invest in more risky asset classes. This coupled with the aforementioned moral hazard can't be good for anyone.
Karl Johansson
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