Too-Big-To-Fail Banks Much Bigger, and Ready To Fail

May 3, 2020 (EIRNS)—Wall Street and City of London banks have swelled in size from Federal Reserve bailout operations and “could spell trouble for the future of the financial system,” according to a commentary by Jeremy Kress in The Hill May 1. Kress teaches business law at the University of Michigan in Ann Arbor.

Restoration of Glass-Steagall is urgently demanded by this situation, though Kress deals with it only as one of “a variety of ways to address the risks” proposed by legislators (Sen. Elizabeth Warren is cited). The fact that JPMorgan Chase, for example, has added $273 billion in deposits from all over the world during the coronavirus crisis, is a bigger expansion than if it had bought the big regional PNC Bank—which even Dodd-Frank prohibits it from doing. Kress points out a crucial risk: The last time Morgan Chase swelled like this, after the 2008 financial crash and bailout, its London office “did not know what to do with all the new deposits” and threw them into corporate bond derivatives markets, losing more than $6 billion in a hurry (“London Whale” affair).

This could happen on a much larger scale now. And as we know from the AIG implosion, the default and bankruptcy of MF Global, and other cases back to Barings in 1997, it will almost certainly be the London office that kicks over the nitroglycerine barrel.

Perhaps fatally, the Federal Reserve and FDIC are now considering following the removal of these banks’ reserve requirements (now zero) by lowering their required capital ratios! Kress observes that “it is dubious that megabanks have sufficient capital cushions to maintain such massive balance sheets. Banks held barely enough capital to pass last year’s Federal Reserve stress tests based on economic projections far rosier than we are experiencing today.”

It’s not even clear the megabanks really have all those massive new assets. Many big corporations have drawn down credit lines, that’s true. But huge volumes of the Federal Reserve’s lending and buying of securities have sent money through shadow banks of various kinds, worldwide, right into the likes of Morgan, while flight capital has also headed there. Those are liabilities which could just as suddenly leave the megabanks again, for new speculations.

They must be broken up before they reach critical mass.