E.I.R. Alert Service
June 17, 2004
Fed Governor warns of "mega-banks".
The recent step-up in creation of $1 trillion mega-banks in the U.S.,
heightens concerns about risks to the entire financial system, and to the
real economy, a senior official at the San Francisco Federal Reserve Bank
asserted, in a highly unusual warning. "[T]he ever-growing scale of bank
mergers raises challenging policy questions, including banking concentration
at the national level and systemic risk concerns," cautioned Simon Kwan, the
head of financial research at the San Francisco Fed. Policymakers must
address these concerns while safeguarding the nation's financial system,
Kwan wrote in an "Economic Letter" on Banking Consolidation, dated June 18.
Until this year, Citigroup was the only $1 trillion-asset banking
organization in the U.S. Now, there are two more: Bank of America, which
merged with FleetBoston; and J.P.Morgan Chase, which is about to complete a
merger with Bank One Corp. Bank mega-mergers, Kwan said, raise anti-trust
concerns, as well as worries about diminished local market competition. More
importantly, "The creation of mega-banks also heightens concerns about
systemic risk," he warned. "When banking activities are concentrated in a
few very large banking companies, shocks to these individual companies could
have repercussions to the financial system and the real economy."
"The increased potential of systemic risk created by mega-banks," continued
Kwan, "also intensifies concerns about these banks being considered
'too-big-to-fail' (TBTF)," or likely to be bailed out by the Federal
government in the event of a crisis. "Mega-mergers create more such
potentially systemically important banks," he said, "and put a higher
premium on credible policies for the orderly resolution of troubled large
banking organizations." EIR has previsouly reported that in the United
States, the share of all banking assets held by the top ten commercial banks
has risen from about 30% in 1995, to about 45% today. That is, the failure
of just the top ten commercial banks would bring down half of the assets in
the commercial banking system.
In parallel, this consolidation process of the banking system has
concentrated derivatives holdings, so that the top ten U.S. commercial banks
hold almost 90% of all derivatives held by the commercial banking system.