Are the Largest Banks Too Complex for Their Own Good? Introduction

September 30, 2012

William Emmons, assistant vice president and economist, provides an overview of his talk surrounding the issue of whether large banks are too complex to manage, giving a brief history of the evolution of large banks in the United States and the mechanisms in place for managing and disciplining them.

Presentation (PDF)


William Emmons: Thank you, everyone, for coming out this evening. And I am also looking forward to Mary's and Steve's comments. Thank you very much, Steve, for coming in.

So this is Dialogue with the Fed. It is interactive. So you now are going to give us some information. Each of you has a clicker in front of you. So tell us whether or not you've been here at the St. Louis Fed before. Don't worry about punching the button more than once. It will only let you vote once.

Okay, so 64 percent of you said you've never been here before. Welcome. Hope you come back again for some other programs.

All right, now a little bit harder question. Where do you work or what do you do? Okay, find something on that list that applies to you. Okay, so we have retired is the largest category, followed by professional or business services. And then third, financial activities or government. All right, that's interesting. We'll make a note of that.

Now this is a harder question. No right answer to this. The first two, I think, there was a right or wrong answer. This one is not. Coming into this discussion, which of the following statements best expresses your views on big banks, however you understand that term? Interesting. Only 5 percent say "I don't have any opinion, any strong opinions." 7 percent say "I think big banks are necessary and some of the criticisms are unjustified." 29 percent say "we don't need big banks. They're a clear and present danger." 59 percent believe there are merits to both sides of the argument and they may be a necessary evil, or you might think of a different term. Okay?

So really the objective for me tonight is to have you explore—maybe some of you will change your opinions. Some of you will maybe have your opinions reinforced. But just to give you more information so that you can make that kind of a judgment.

So I'm going to start before I get into the real substance of the comments, just pull out a few quotes that I think illustrate these two exaggerated opposite points of view. Why we need big banks, why they are good, why they are necessary. This is from William Harrison, who was the CEO of JP Morgan Chase up until 2006. He said, "America's largest businesses operate around the world and simply have to work with international banks. If they can't work with a global bank based in America, then they will work with one based overseas." In other words, the United States will not be able to provide that service.

On the other side of this debate, if you will, this is from one of the chairs, the two co-chairs of the Financial Crisis Inquiry Commission that was created by Congress. He said, now after the report came out, this was speaking in a personal capacity, he said, "These banks are too big to fail. They're too big to manage. They're too big to regulate. They're too complex to understand. And they're too risky to exist. And the bottom line is they offer very little benefit."

Another version of that argument is from Richard Fisher, the president of the Dallas Fed, who said earlier this year, "Too big to fail banks," and I'll explain what I mean by too big to fail, "these are a perversion of capitalism and a clear and present danger to the U.S. economy, resulting in an erosion of faith in American capitalism."

And then finally from James Bullard, our president, "We do not need these companies to be as big as they are. We should say we want smaller institutions so they can safely fail if they need to fail." And I'll emphasize that last point. Sometimes institutions need to fail. That's essentially what capitalism is about, is when a firm is no longer viable it should be able to leave the market. And so what President Bullard is saying is that we did not have the possibility, we couldn't let some banks fail, and that was the problem that really we're trying to figure out.

So what I want to talk about tonight is first explain some of the things that Julie mentioned to you. What I'm calling big banks misbehaving. Then I want to switch and talk a little bit more theoretically really. Why do we have banks and why do we have big banks? What are the forces that would be driving banks to become very large and complex? And then I'll talk a little bit about some of the mechanisms for dealing with or managing or disciplining large complex banks, and then spend a little time near the end thinking about where do we go from here, both in terms of very radical thoughts that some people have suggested, and also some of the regulatory changes that are in process right now that are being implemented by people like Steve and Julie as they deal with financial institutions. And then we'll open it up. We'll bring up our panelists and we'll open it up to questions and comments.

This popular lecture series addresses key issues and provides the opportunity to ask questions of Fed experts. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

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