In a memo a few months ago, I suggested that Mr. Trump’s policies on finance were he elected would be to push for a de facto or even de jure “narrow bank” – a forecast validated by the Trump campaign’s strong endorsement of a new-style Glass-Steagall Act. In this same note, I predicted that Mrs. Clinton would in office go another way: de facto restructuring of the biggest banks into utilities so that the presumed TBTF stamp came at a stiff price. Rhetoric in Philadelphia pushed Mrs. Clinton a bit closer to Mr. Trump on financial reform – stunning consensus given the chasm otherwise dividing them. Why are the left and the right pushing the middle so hard on dramatic bank restructuring? This is a complex, critical question requiring further analysis, but the short answer is that everyone hates banks – big ones most of all – because everyone thinks they not only caused the financial crisis, but now are profiting thereby. That’s wrong, but so what – if this election proves anything, it’s that anger beats analysis.
How do I know that the consensus view characterizes the biggest banks as the source, perhaps in cahoots with the Fed, of the nation’s economic woes? A simple, but significant indicator is how branded the biggest banks have become as “TBTF.” Read any headline ranging from earnings releases to a CEO’s speech and the big bank involved is dubbed a “TBTF bank”. Same goes for FRB rules, legislation, and the like – headlines such as, “Fed Proposes Capital Charge for TBTF Banks” tell one at first glance why policy is still pushing towards the combined narrow/utility banking options contemplated by each of the campaigns.
Can the biggest banks shake the TBTF moniker? Not through the series of love-me-better Metro signage occasionally trotted out in hopes of rebranding the GSIBs. Policy-focused presentations on how much safer the biggest banks have become have helped with the in-crowd, but they aren’t swaying public opinion. To do this, we would really have to believe that even the very biggest bank could be shuttered without systemic risk and no one I know is yet confident of this.
That the biggest banks would still falter with uncertain impact doesn’t make them TBTF – Dodd-Frank did take care of that through express bans on any repeat of the 2008 rescues crafted by Treasury and the Fed – but that doesn’t much matter. The lack of a clear, at-hand market path to orderly resolution without either taxpayer bail-out or market catastrophe is, in my view, the signal failing of the post-crisis U.S. regulatory edifice. Thousands and thousands of pages later and we’re still far from assured that Mr. Tarullo’s “negative externalities” are short-circuited. Hurt by the lingering and substantial cost of the crisis and frightened of a repeat, it’s unsurprising that most folks want something done to fix this and the only fix they know reaches to “TBTF banks.”
Big banks are not, of course, the only financial colossi that could crumble under stress. Indeed, all the rules they’re under now make them the least likely to do so – see how well banking withstood Brexit and be comforted. The weakest links are in fact now the non-banks – especially the financial utilities -- still exempt from anything like the resolution preventatives liberally prescribed for the biggest U.S. banks.
Would a better understanding of the financial system detoxify TBTF banks? Of course, but that’s very hard to achieve. When it comes to talking politics, almost everyone knows what JPMorgan Chase or Bank of America is – ask the person on the street about “BlackRock” and get either a blank stare or directions to the nearest climbing wall.
Is it either fair or right that the biggest banks are labelled TBTF? No. Does it matter that Starbucks’ coffee is far inferior to any number of smaller coffee shops struggling in its shadow? Not much. Branding is power and the big-bank brand is toxic. It’s too late to do much about that for this election, but it’s the most critical challenge facing not just the biggest banks, but also the rest of the financial-services industry in 2017.