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Why ‘Too-Big-To-Fail’ matters to all of us

(Chelsea Update would like to thank John Mann, president and CEO of Chelsea State Bank for this column. I’m delighted to announce that he and his management team plan to write a twice monthly Sunday column about banking and money topics for Chelsea Update.)                               

As bank consumers, the term “Too-Big-To-Fail” as it relates to the U.S. Banking industry is probably not high on your list of major concerns in your everyday lives.

Most of us don’t typically spend our days pondering things like financial services policy, systemic risk and moral hazard. At least, not until these things begin to have a noticeable impact on us personally.

Here is one way to put this issue into focus so you can better understand why Too-Big-To-Fail matters to all of us.

Say your local community bank was taken over by a greed-crazed gambler, who made risky bets, lost, and went out of business. Your deposits are insured through the FDIC and you can just go to the bank across town that’s not so poorly managed.

CSB logoBut if JP Morgan, Bank of America, Citigroup, or any of America’s biggest banks exhibits the same behavior, the response has been “can’t let them go out of business.” To do so would allow other huge financial institutions that trade with them to go out of business, causing the entire American economy to tank.

What this scenario shows is that the financial industry is too consolidated, and the big banks are too big. There is no flexibility in the network. The major players have become so powerful that they are able to, in essence, force governments, and that means we the taxpayers, to clean up their messes.

This is why the community banking industry nationwide has been leading the effort to end Too-Big-To-Fail. From regulators and industry advocates to members of Congress and the news media, it’s clear that Washington is moving to take on the controversial topic of Too-Big-To-Fail.

A Plan to End Too-Big-To-Fail

Recently, the effort has gained momentum in the form of new legislation introduced by Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.). The bill would help end the threats posed by Too-Big-To-Fail financial institutions.

The Terminating Bailouts for Taxpayer Fairness Act of 2013 (TBTF Act, S. 798) seeks to end federal subsidies and funding advantages for financial firms larger than $500 billion in assets. It would also stop government distortions of the financial markets that foster incentives for risky behavior by Wall Street megabanks and put we, the taxpayers, at risk.

In addition to bringing market discipline to the Too-Big-To-Fail banks, the Brown-Vitter bill also offers much-needed regulatory relief to community banks. It will allow them to serve consumers and small businesses in their areas. This common-sense relief will let community banks do what they do best—create jobs and serve our nation’s cities, towns and rural areas.

The legislation includes an expanded definition of “rural” for purposes of the qualified mortgage definition, and an exception to the annual written privacy notice requirement when the financial institution has not changed its policies.

Other provisions include relief from certain data-collection requirements and strengthened accountability in bank exams through a workable appeals process.

A Rasmussen Report national telephone survey this spring showed that 50 percent of U.S. adults favor a plan to break up the 12 megabanks. These big banks control about 69 percent of the banking industry.

The poll also showed 23 percent of the public opposed breaking up the largest banks, while another 27 percent were undecided.

These findings are a significant change from an October 2009 poll, in which 43 percent of Americans said that banks considered Too-Big-To-Fail should be broken up into a series of smaller companies. In addition, 55 percent said the government should let Too-Big-To-Fail banks go out of business if they can no longer meet their financial obligations.

For community bankers who live and breathe financial news and policy on a daily basis, the Too-Big-To-Fail issue is at the top of our minds. We see the impact on our financial system day in and day out—in our regulatory workload. It also affects our cost of funds relative to the megabanks, and in the inequitable treatment of Main Street and Wall Street.

The Rasmussen survey tells us that the American public is fed up, too. Based on this poll, it would now appear most of us are on the same page as community bankers.

So let your congressmen and senators know how you feel. It is time to end Too-Big-To-Fail.

About Chelsea State Bank

Chelsea State Bank is a full-service financial institution with offices in Chelsea and Dexter. The bank was formed more than 100 years ago by local farmers and business leaders to provide timely financial solutions to individuals, families and businesses in the community. This tradition of community service continues today.

For more information, please visit or call the bank at 475-1355.

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