Calling the Big Banks Bluff

Another impediment is the dominance of large banks.

I think the Obama administration has succumbed to political pressure and scare mongering by the big banks.

Big companies, from banks to airlines, are contributing as well.

But the world s major central banks seem not to have noticed.

The chief point of intersection between the European and US approaches is major banks.

Either banks need to default on their senior obligations, or the government will need to default alongside the banks.

And the interlinkages between major global banks are a major, if diffuse, worry for all involved.

Each of the world s major central banks can make plausible arguments for caution.

And, according to this narrative s advocates, almost all big banks display symptoms of chronic mismanagement.

No big bank was at risk from trading securities then, but the big banks investment banking affiliates were not making money trading and underwriting securities during the Depression, so the banks were willing to surrender that part of their business.

This bias is mitigated in advanced economies by various flexible financing tools offered by large banks.

None of the major banks met even the Basel 1 standards for capital adequacy.

One day a major bank, insurance company, or automaker announces a record loss.

The developing world is up in arms over the major central banks reckless tactics.

To be sure, CEOs of major banks have been forced out before.

So did a director of a great bank, a brilliant economist, when he was suspected of financial crimes.

Many of America s big banks moved out of the lending business and into the moving business.

This gives them a capital base similar to the combined assets of all the world s major hedge funds.

One major bank building (ING's Amsterdam headquarters) in the Netherlands was constructed to be autonomous and artistic as well.

Goldman is right that small banks fail and have been protected by government insurance and bailouts but that means that the big banks funding advantage over small banks needs to be added to whatever advantage the small banks themselves have.

The big surprise here is not that central banks acted decisively and boldly when financial markets froze and economic activity plummeted.

The chiefs of major European banks such as Deutsche Bank, Barclays, and Société Générale were naturally also unanimous in their hostility.

ICICI Bank is one of the Big Four banks of India, along with State Bank of India, Punjab National Bank and Bank of Baroda.

Big banks ability to extort such an arrangement stems from an implicit threat the financial sector and with it the economy s payment system would collapse if a systemically important bank were ever pushed into insolvency.

A massive liquidity injection by the government ensured that no major bank collapsed, and minor bank failures were administered in a surprisingly orderly fashion.

Unfortunately, there are three flaws in the FSB s framework that will prevent it from being effectively applied to large global banks.

The United States Federal Reserve, the European Central Bank, and the Bank of England are particularly exposed.

After all, deposits from the small town banks were running off to big banks in money centers like New York, Chicago, and Los Angeles.

On the face of it, these moves appear to be well justified, given the mayhem created by poorly regulated banks in the major financial centers.

Although the major Italian banks were constructed on the same model as the German and Austrian banks whose collapse had ignited the global conflagration, and although the Italian banks were just as insolvent, the press never discussed these unpleasant problems.

But that decision, and bad policies by central banks and governments since then, has given over indebted major banks the power to blackmail their rescuers a power that they have used to create a financial system in which they are effectively exempt from liability.

For instance, we know that the global capital adequacy requirements produced by the Basel Committee reflect overwhelmingly the influence of large banks.

This system had been abandoned elsewhere, and the reform opened London to new types of institutions, especially the major US investment banks.

Such a tax, moreover, would aim to eliminate the funding advantage that large banks enjoy over their smaller competitors, while limiting the incentive for big banks to become even bigger.

More recently, in the early 1980 s, the International Monetary Fund and the central banks in the big industrial countries teamed up to pressure banks into extending more credit to the big Latin American debtor countries.

Now, given the profound sovereign debt crisis in the eurozone periphery, government defaults threaten to take down the big banks.

The third change is a tax on the financial sector, in the form of a Financial Activities Tax on profits and remuneration at big banks that enjoy implicit government guarantees.

The irony is that Congress took up the big banks offer to separate commercial and investment banking, but then enacted deposit insurance anyway.

The tests were seen as credible indeed, their results prompted US officials to force several major banks to increase their capital.

America s SEC did not require more capital or halt risky practices at the big investment banks.

It was not until the 1980s that the practice spread to major banks and corporations, and beginning during the 1990s, mark to market accounting began to result in scandals.

The chief point of intersection between the European and US approaches is major banks. This convergence has less to do with regulatory thinking on bank size or function than with a common need to play to the political gallery and raise more tax revenue.

Many other central banks are nervously watching the situation, well aware that they may soon find themselves in the same position as the global economy continues to soften and default rates on all manner of debt continue to rise.

Barclays Capital estimates that only a few globally significant foreign banks hold close to 10 of their Tier 1 capital in Greek government bonds, with the majority holding much less.