Lessons Learned from 2008: Too Big to Fail –vs- Too Small to Thrive

Go Lean Commentary

It is now 10 years later. The world is remembering the Financial Crisis of 2008.

This is the anniversary of the peak day, that of Lehman Brothers bankruptcy filing on September 15, 2008. The world has endured a lot since that time, we have looked, listened and learned. We have even added some new phraseology to our vocabulary; think …

… “Too Big to Fail”, a theory in economics that asserts that certain corporations, particularly financial institutions, are so large and so interconnected that their failure would be disastrous to the greater economic system, and that they therefore must be supported by government when they face potential failure.[1] .

“Too Big to Fail” was a Big Deal. This is more than just an academic discussion – see AUDIO Podcast below. In 2008 the biggest impact of the global financial contagions was the dilution of net worth for the citizens of the affected countries: US, Canada and Western Europe. These economies are the primary source of Caribbean tourists; since tourism is the primary economic driver, this was a real problem for the pocketbooks of every individual and institution in the region.

This is the continuation of a series of commentaries relating the Lessons Learned from 2008.  This one – entry 2 of 4 in this series from the movement behind the book Go Lean … Caribbean – is in consideration of the “economic chaos” that led-up to the 2008 Financial Crisis and the contrast between “Too Big to Fail” and “Too Small to Thrive”. Due to the contagions of 2008, the Caribbean also had economic collapse, but not because our banks are too big; rather they are too small – think parasite attached to a sick host – they have no leverage or shock-absorption from servicing the full region.

The commentaries in the series are fully cataloged as follows:

  1. Lessons Learned from 2008 –The Long View – ENCORE
  2. Lessons Learned from 2008 – Too Big to Fail –vs- Too Small to Thrive
  3. Lessons Learned from 2008 – Righting The Wrong – ENCORE
  4. Lessons Learned from 2008 – Still Recovering

All of these commentaries relate to “how” the stewards for a new Caribbean can shepherd the economic engines of the region to apply the best-practices to finally make progress; move forward, not stand still and not go backwards.

The book Go Lean…Caribbean serves as a roadmap to implement the technocratic Caribbean Union Trade Federation (CU) and Caribbean Central Bank (CCB) to provide better economic stewardship, to ensure that failures of the past do not re-occur.

What economic failures?

In a previous Go Lean blog-commentaries, it was detailed how our region has had to endure financial crises; yes this includes the Too Big to Fail collapse in the US but also home-grown ones in our neighborhood. The financial system we live in today has been transformed because of the impact and consequence of previous crises. So the banks that have the Too Big to Fail designation now get additional protection and can thusly grow – with less regard to risk. And grow, they have!

NEW YORK – MARCH 24: (FILE PHOTO) The JP Morgan Chase building is seen March 24, 2008 in New York City. The banking giant posted a $2.7 billion profit in the second quarter July 16, 2009, a 36% jump from 2008. Revenues were up 39%, at $25.62 billion. (Photo by Chris Hondros/Getty Images)

This was the summary from this news article/PODCAST here, where it explains that “just six banks now manage more than half the assets in the whole banking industry”. In fact, one sample bank, JPMorganChase, now manages US$2.8 trillion in assets; that’s more than the gross domestic product of Canada, Italy or Brazil. Listen to the PODCAST here and see that full transcript in the Appendix below:

Audio-Podcast– Once “too small to thrive,” now some banks are “too big to fail” –https://play.publicradio.org/api-2.0.1/d/podcast/marketplace/segments/2018/09/11/mp_20180911_seg_19_64.mp3

So how and why did community banking become national banking or global banking? One word: Consolidation. The foregoing PODCAST quotes:

“There’s been a tremendous amount of consolidation during the last four decades,” … “The American banking system went from about 13 or 14,000 commercial banks four decades ago down to closer to 5,000 now.”

This is the advocacy for the Caribbean, here in the Go Lean book. The strategy is for all the 30 member-states in the region to consolidate, collaborate and confederate to form a Single Market economy. The regional leverage allows for more growth because of a larger, stronger market. This consolidation – across 30 countries of 5 different colonial legacies and 4 languages – is for banking as well. This is to be shepherded by the CCB, a formal cooperative (collusion) of all the Central Banks in the region. The CCB will be ready for the heavy-lifting of this regional stewardship.

Without this cooperative, we will never have “Too Big to Fail”, instead we will only have “Too Small to Thrive”.

So imagine 1 currency, the Caribbean Dollar! Imagine the proliferation and liquidity of vibrant Capitals/Securities Market.

Welcome to the new Caribbean economy.

Here is where the Lessons from 2008 weigh heavy. A consolidated, integrated banking system will mean more linkages among the member-states of a new economic union. So the issue of financial contagions among these linked communities will now be a constant concern – so there must be a constant sentinel: the Caribbean Central Bank.

The prime directive of the CU/CCB roadmap is to optimize the economic engines of the region despite the reality of financial contagions. This need was pronounced early in the Go Lean book, in the Declaration of Interdependence – (Page 13):

xxv. Whereas the legacy of international democracies had been imperiled due to a global financial crisis, the structure of the Federation must allow for financial stability and assurance of the Federation’s institutions. To mandate the economic vibrancy of the region, monetary and fiscal controls and policies must be incorporated as proactive and reactive measures. These measures must address threats against the financial integrity of the CU and of the member-states.

The foregoing PODCAST relates the peril associated with banks only tied to a mono-industrial local economy; this quotation:

… Texas, where oil was king in the ‘80s. Texas had more banks than any other state. Regional banks, like those in Texas, were not diversified. They were tied to the local economy. So when the price of oil fell to $10 a barrel, hundreds of Texas banks failed.

The foregoing PODCAST helps us to appreciate the regional vision: We do NOT want to be “Too Small to Thrive”, but we do not want to grow to be “Too Big to Fail” either. There must be a happy medium, a “Goldilocks” destination.

VIDEO – Goldilocks and the Three Bears – https://youtu.be/PGI-4MrC_b8

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Published on Jul 8, 2016 – Your children will love this popular children’s fairy tale, “Goldilocks and the Three Bears” song and story! Goldilocks and the Three Bears is from the CD and CD Download “La Di Da, La Di Di, Dance with Me.” “La Di Da, La Di Di, Dance with Me”.

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The Go Lean book provides 370-pages of turn-by-turn instructions on “how” to adopt new community ethos, plus the strategies, tactics, implementations and advocacies to execute so as to reboot, reform and transform the societal engines of Caribbean society … including banking and monetary control. We must have the technocratic bank supervision and oversight: assessing risk factors, monitoring risks, managing leverage and regulating industry performances.  There is an advocacy in the book that relates specifically to bank supervision; consider the specific plans, excerpts and headlines from the book on Page 199 entitled:

10 Reforms for Banking Regulations

1 Lean-in for the Caribbean Single Market
This treaty allows for the unification of the region into one market, creating a single economy of 30 member-states, 42 million people and the GDP impact of over $800 Billion. In addition, the CU treaty creates a security apparatus to defend against regional threats and systemic risks. When it comes to banking, without proper oversight, the financial systems can imperil the region’s economic security. Deficient oversight can also foster an environment for lawlessness with bad actors exploiting the lack of controls for money laundering, tax evasion and even funding terrorists. Many countries in the region have (had) a vibrant offshore banking industry. But with international reforms from the OECD (an arm of the IMF), US Treasury/Justice Departments, and other institutions, there has been external and internal pressure to reform the industry to curb illegal activities and cooperate more with cross border investigations. … The CU economic and security reboot will bring the balanced oversight, plus added protections like deposit insurance.
2 Foreign Currency Considerations
The Caribbean Dollar (C$) will be traded in the international market, so the need for various currencies will be minimized. Domestic currency devaluations were among the Failed-State indices that drove a lot of Caribbean citizens to emigrate. The reforms associated with securing the new regional currency, C$, is therefore vital. For example, all casinos in the region will be expected to “game” in Caribbean dollars.
3 Debit Cards & e-Government Disbursements
4 e-Purse and Internet Commerce
5 NFC and Mobile Payment Systems
6 Mortgage Banking
7 Credit Card Banking
8 Fair Credit Reporting
9 Fair Collection Practices
10 Bankruptcy Reform

The related subjects of banking oversight and optimizing  financial governance have been a frequent topic for Go Lean blog-commentaries; see a sample here:

Leading with Money Matters – The Almighty Dollar
Failure to Launch – Economics: The Quest for a ‘Single Currency
West African Case Study: ECOWAS to Launch ‘Single Currency’
Transforming ‘Money’ Countrywide
European Central Bank launch 1 Trillion Euro Stimulus
For Canadian Banks: Caribbean is a ‘Bad Bet’
5 Steps of a Bubble – Learning to make a resilient economy
Canadian Imperial Bank of Commerce failing investment in FirstCaribbean Bank
Barbados Central Bank records $3.7m loss in 2013
Dominica raises EC$20 million on regional securities market

The 2008 Great Recession / Financial Crisis exposed the trappings of the interconnected global economy. If we, in the Caribbean, are going to “play in this sandbox” – transact in this marketplace – then we must be prepared and On Guard, for the risks, threats and dangers.

Big Hairy Audacious Goal (BHAG)!

We were not prepared in 2008! We were Too Small to Thrive.

We must be ready now … and going forward! We must learn and apply this lesson from 2008.

This is the quest of the Go Lean/CU/CCB roadmap, to elevate the societal engines of the region, the member-states individually and the Single Market as a whole. Yes, we can! The roadmap details these 3 prime directives:

This quest is the BHAG for the Caribbean region, but it is conceivable, believable and achievable. Now is the time for change; time for all regional stakeholders, individuals and institutions, creditors and debtors, to lean-in to this roadmap for the CU and CCB.

The functioning of this roadmap is complex and complicated, requiring heavy-lifting. But the destination of this roadmap is simple: a better place to live, work and play. 🙂

Download the free e-Book of Go Lean … Caribbean – now!

Sign the petition to lean-in for this roadmap for the Caribbean Union Trade Federation.


APPENDIX – Once “too small to thrive,” now some banks are “too big to fail”
By: Sabri Ben-Achour

The idea behind “too big to fail,” of course, is that some institutions are just so massive and interconnected that their failure would mean disaster for the economy.

And today? Lots of firms seem to fit that classification.

Let’s just take JPMorgan Chase. It manages $2.8 trillion. That’s more than the gross domestic product of Canada, Italy or Brazil. Just six banks manage more than half the assets in the whole banking industry. Most of them would be considered too big to fail.

There was a time when banks were small and plentiful.

“At the all-time peak in the United States, around 1921 or 1922, there were 31,000 or 32,000 banks,” said Richard Sylla, New York University financial historian and professor emeritus.

The Great Depression wiped out thousands of banks, but for about 40 years after that, the number was stable. Until it wasn’t.

“There’s been a tremendous amount of consolidation during the last four decades,” Sylla said. “The American banking system went from about 13 or 14,000 commercial banks four decades ago down to closer to 5,000 now.”

One reason there were so many banks is because state laws ensured it. Federal law left the regulation of bank branches up to states. Different states had different rules, and rules within states could be pretty restrictive.

“For most of American history, banks were not able to cross state lines,” said Frederic Mishkin, Columbia University professor of banking and financial institutions. “In some states you could only have only one branch.”

Some banks lobbied for it to be this way, Mishkin said.

“This actually was a way for banks to not be as competitive, and particularly if you’re a bank in one state you don’t want to have people from other states come in and take away some of your business. So you’ll fight like hell to keep them out,” he said.

Just because there were a lot of banks back in the ‘70s and ‘80s does not mean they were good banks.

“I lived in Chicago in the 1980s, and the service was just horrendous because the competition was just terrible,” Mishkin said. “I had a case where they had a check that that was forged. They cashed it and they’re supposed to give me the money back. I never got it back. So it was a different world.”

But the real problem for banks of that era was that because they were small, they were fragile, said Robert Hendershott, hedge fund portfolio manager and Santa Clara University associate professor of finance. “Having tens of thousands of tiny little banks is economically insane,” he said. “It is not an efficient way to organize a banking system.”

Today we talk about banks being too big to fail, but back then they had the opposite problem.

“The U.S. banking industry was too small to thrive,” Hendershott said.

He points to Texas, where oil was king in the ‘80s. Texas had more banks than any other state. Regional banks, like those in Texas, were not diversified. They were tied to the local economy. So when the price of oil fell to $10 a barrel, hundreds of Texas banks failed. The number of banks in the United States also shrank during the thrift crisis in the late ‘80s and the recession in the early ‘90s.

It’s at this point that Congress started to take notice, and in 1994, it passed the Interstate Banking and Branching Efficiency Act.

“That was where Congress tore down all the barriers and banks became free to merge and grow across state lines,” Hendershott said.

And that is exactly what banks did. Through the Great Recession, banks consolidated even further as some failed and were bought up by others. And more banks went from “too small to thrive” to “too big to fail.”

This story is part of Divided Decade, a yearlong series examining how the financial crisis changed America. 

Source: Posted September 11, 2018; retrieved September 17, 2018 from: https://www.marketplace.org/2018/09/11/economy/divided-decade/once-too-small-thrive-now-some-banks-are-too-big-fail

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