At the height of the U.S. financial crisis in 2008, Goldman Sachs and Morgan Stanley, two of the largest investment banking firms in the world, requested a Federal Reserve (Fed) “bailout.” A portion of this “relief” consisted of classifying Goldman and Morgan as bank holding companies thus allowing both firms to borrow from the Fed discount window with Goldman borrowing $782 billion and Morgan $107 billion. Even foreign banks, such as the Royal Bank of Scotland and Swiss giant UBS AG got into the action, each borrowing over $75 billion from the Fed.
The Fed labeled these firms with assets over $50 billion as “too big” to fail. In addition to this Fed policy, the U.S. Congress passed Dodd-Frank in 2010 but emasculated the bill’s Volcker Rule. Both actions provide “big” banks with a competitive advantage since the fixed cost required to adhere to Dodd-Frank are a much larger burden for community banks and abandoning the Volcker rule allows big banks with trading operations to undertake speculative investments in hedge funds and private equity rather than traditional lending activities.
What have been the unintended consequences of all of this big bank support? Investors have overinvested in these behemoth institutions since their continued life is guaranteed even as they undertake excessive speculative activity.
From the beginning of the recession until the end of 2012, the Fed’s 34 too big to fail banks grew in size by an average 14.8 percent while the remaining 1,680 commercial banks actually declined in size by an average of 4.2 percent. Thus, Congressional and Fed actions have actually ballooned systemic risks and undermined community banks that provide a lending lifeline to small businesses and agricultural borrowers. Ernie Goss.