In an interview today in Paris, Nobel Laureate Joseph Stiglitz said that while the Obama Administration has managed to stave off the collapse of the banking system, it has also failed to address the underlying problems of the banking system. He further adds that the Obama Administration is “very reluctant to do what is necessary.”
From Bloomberg News:
“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview today in Paris. “The problems are worse than they were in 2007 before the crisis.”
Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama’s administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing “excessively.”
A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America Corp.’s assets have grown and Citigroup Inc. remains intact. In the U.K., Lloyds Banking Group Plc, 43 percent owned by the government, has taken over the activities of HBOS Plc, and in France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis.
While Obama wants to name some banks as “systemically important” and subject them to stricter oversight, his plan wouldn’t force them to shrink or simplify their structure.
Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action.
What is necessary is breaking up the banks, separating ancillary business from core banking functions as well as increased regulation. Post the collapse of the Lehman Brothers that set off the financial meltdown, there has been a marked consolidation in the US banking sector. The four largest banking companies now control more than 40% of the nation’s deposits and more than 50% of the assets held by United States banks.
A principal worry is that the Obama Administration is failing to address the systemic risk caused by the creation of giant nationwide franchises overlapping and competing with each other in various local markets. Moreover, banks that perceive themselves as “too big to fail” continue to engage in questionable practices taking on excessive risk because should they fail the government will act to prevent their collapse.
This dilemma of “too big to fail” was addressed by Federal Reserve Chairman Ben Bernanke during a March 2009 speech at the Council on Foreign Relations: “Authorities have strong incentives to prevent the failure of a large, highly interconnected financial firm, because of the risks such a failure would pose to the financial system and broader economy…However, belief that a particular firm is considered too big to fail has many undesirable effects.” Chairman Bernanke noted that such a belief reduces market discipline and encourages excessive risk-taking by larger institutions, provides an artificial incentive for firms to grow, in order to be perceived as too big to fail, and creates an unlevel playing field with that of smaller firms, which may not be seen as having implicit government support.