There’s a credible school of thought that you can determine whether or not banking industry reforms like Dodd-Frank are working by whether or not industry profits have slowed. Well, the FDIC has your answer:
Bank profits in the first quarter of 2012 reached their highest quarterly income levels in nearly five years, a federal banking regulator said Thursday.
“The condition of the industry continues to gradually improve,” said Federal Deposit Insurance Corp. Chairman Martin Gruenberg [...]
Bank net income for the first quarter of 2012 was $35.3 billion, up by $6.6 billion from the first quarter of 2011. The FDIC said that once again lower provisions for loan losses contributed to earnings improvements.
This number is across all banks, including community and regional banks. But the real wealth here is concentrated at the top. And those banks have expanded in size since the financial crisis to the point where the Big Six banks control assets worth over 60% of gross domestic product.
And there’s no real reason for this. The Bank of England ran a study a couple years back that showed that economies of scale top out around $100 billion in assets. Anything bigger is just unnecessary. All it does is increase the subsidy for too big to fail; in fact, the existence of that subsidy, the implicit knowledge that a systemically important firm will always get a bailout, drives the desire to grow and grow. And certainly the case for the social utility of megabanks is dubious:
Value added by the financial industry, its direct contribution to the economy, topped $1.2 trillion in 2011, according to government statistics. That’s 8.3 percent of gross domestic product, double its share of three decades ago. To paraphrase Goldman Sachs’s Lloyd C. Blankfein, this looks like God’s work on steroids.
But the measure is hopelessly flawed. Because banks’ output is measured by the interest they charge for credit, their contribution to the economy appears to increase when they take bigger risks at higher yields. By this measure, your Uncle Fred’s session at the slots in Vegas should count as G.D.P. Banks’ fast-growing contribution to the economy is an illusion, the mechanical result of a huge expansion in the risks they decided to take [...]
Economists know there is a point after which more lending stops helping and starts hurting growth. One study puts it at about 110 percent of gross domestic product. On the eve of the crisis, credit to the private sector in the United States reached 213 percent of G.D.P., up from 96 percent in 1982. And all we got was a mass of busted residential mortgages.
Maybe the FDIC is right when they insist that they can handle a big bank failure. But that says nothing about big bank value. The economic benefits to big finance packaging mortgages into complex securities, or placing casino bets with trillions of dollars in deposits, are practically non-existent. We need banks to ensure the swift allocation of credit to those who need it. That can happen with a much, much smaller industry.