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Too-big-to-fail: Still there

One simple graph by the Thomas M. Hoenig, Vice Chairman of the U.S.’s Federal Deposit Insurance Corporation (FDIC) on how big banks (defined as those with assets over $10 billion) in the U.S. have become bigger and bigger in the past three decades.

Simon Johnson summarizes his observations nicely:

The facts may startle you. In 1984, the US had a relatively stable financial system in which small, medium, and – in that day – what were considered large banks had roughly equal shares in US financial assets… Since the mid-1980’s, big banks’ share in credit allocation has increased dramatically – and what it means to be “big” has changed, so that the largest banks are much bigger relative to the size of the economy (measured, for example, by annual GDP). As Hoenig says, “If even one of the largest five banks were to fail, it would devastate markets and the economy.”

I would add that the market share of the biggest banks have doubled since the late 1990s, when the financial deregulation in the U.S. took place under Robert Rubin and Larry Summers. Despite a short dip during the 2008-09 financial crisis, the growth trajectory in assets by these biggest banks have already resumed. In short, big banks are still getting bigger and bigger, which would make regulators’ determinations to end too-big-to-fail incredible. And the reform may be starting to lose momentum. As Hoenig said:

[M]uch remains undone and I suspect that 2014 will prove to be a critical juncture for determining the future of the banking industry and the role of regulators within that industry. The inertia around the status quo is a powerful force, and with the passage of time and fading memories, change becomes ever more difficult.

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