Too Big To Fail Has Gotten Worse

A Daily Ticker story troubled me today.

According to the story, there is still “considerable risk” in the banking sector. Regulators, according to the story, have done little to tackle the problems that both caused and were revealed by the 2008 crisis: excessive leverage, lack of transparency and distortion that created “too big to fail” institutions.

Basically, “too big to fail” has gotten worse, or so the story goes. The biggest banks control an even greater portion of U.S. deposits and nothing has been done to make their holdings more transparent, according to the story.

This comes on the same day that BofA CEO Brian Moynihan is squaring off against critics as he tries to stanch the BoA’s bleeding share price (BofA has lots about half its value this year, it’s the least well-capitalized of the U.S. banking giants and the most heavily exposed to mortgage problems roiling the U.S. economy, according to MarketWatch).

So I reached out to my financial services sources. One banker agrees. “Too big to fail” has become the law of the land, the source says. In their efforts to reduce the concentration of power among large banks, financial reforms have instead created a lot of incentives to produce larger institutions. More importantly, reforms have hurt small banks, the source says. “Small banks face a lot of headwinds to attracting capital and realizing appropriate returns on capital,” the person says.

Another banker doesn’t think small banks have a hard time raising cash. “There is a lot of interest in denovo banks,” the source says. PE firms are very, very interested in banks (think Thomas H. Lee, the Carlyle Group, the Blackstone Group etc), the person says. “We have a number of buyers for denovo banks,” the person says. “Is it cheap? No.”

The same source thinks the “BofA situation has gotten a lot of people spooked and they enjoy being spooked. It makes a profit for them. Especially the black box traders.”

Still, a PE exec agrees that risks still exists and pointed to BofA. “Moynihan is out of his league,” the source says. “Countrywide could sink them. And that’s the biggest bank in America!”

However, the PE exec thinks risks are “more idiosyncratic than systemic.”

“The economy is no longer in recession, it’s just not growing,” the source says. “It seems like there is as much political risk as anything these days.”