Later On

A blog written for those whose interests more or less match mine.

Payroll Protection Plan: Congress without lobbyists

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Matt Stoller has an extremely interesting column in Big. Here’s just one section:

(3) Small Banks Are Competent, Big Banks Are Not

One of the more heated debates in banking politics is the importance of size. Traditionally, reformers have attacked large financial institutions using the label Too Big to Fail, alleging big banks were dangerous because they took on too much risk and could bring down the financial system. A very powerful counter-argument is that as risky as they might be, big banks are necessary. Big banks, so goes the argument, are simply more efficient than small banks because banking is a scale business.

Bank lobbyists love to argue for the benefits of scale, as do their allies at the Federal Reserve. Cleveland Fed Chair Loretta Mester, for instance, in 2010 dismissed research showing small banks are perfectly efficient, and argued that there were “significant scale economies at even the largest banks.” I don’t mean to pick on Mester, it’s a commonly held view that defending small banks is a vestige of nostalgic populists yearning for the days of yore, versus the savvy Jamie Dimon-types who, whatever you might say about risk-taking, are capable of acting.

As it turns out, however it’s the big guys who can’t actually get things done. What we are seeing with the small business lending program is big banks are not only risky, but incompetent. Here’s the LA Times:

Small businesses that rushed in vain to tap $349 billion in emergency U.S. loans to survive the coronavirus crisis are facing a harsh reality: Some of the nation’s top banks lagged behind relatively tiny rivals in handling applications.

As banking giants tried to automate the process, hundreds of employees at Texas lender Cullen/Frost Bankers Inc. volunteered to fill out forms manually, working late into the night in homes to set up $3 billion in loans. That contrasts with Wells Fargo & Co., which arranged only about $120 million by the time the program was depleted this week, according to people briefed on its progress.

A lot of the arguments for the importance of scale in banking boiled to fake commentary about technology spending, and how fancy big banks hired fancy IT specialists to fancy fancy. (I’m paraphrasing.) Of course many of us have been told that big bank IT infrastructure is terrible, often smoke and mirrors, and that in fact big banks have few commercial banking relationships and little ability to lend to ordinary people except through highly automated programs like credit cards.

And not only were smaller banks nimbler and more effective, but it was larger banks that caused some of the corruption problems, like the wildly inappropriate loans to Ruth Chris by J.P. Morgan. I suspect this failure by big banks, and the success of small ones in lending, will have lasting political consequences.

To offer a historical analogy, in the 1933 banking crisis, many cities ran out of cash, and began issuing municipally created scrip backed by future tax collections. Locally owned stores tend to accept this scrip, while national chain stores did not. Popular anger at this anti-social behavior by chains boosted the movement against chain stores, which in the late 1930s had a series of policy victories to reign in the big guys.

I suspect we will see a repeat. It’s one thing to blow up the world economy, which big banks did in 2008. It’s another thing to not be able to actually make loans. I mean, if Wells Fargo can’t make loans when the government gives them a guaranteed return, what’s even the point of Wells Fargo except as an institution for politicians to yell at when caught yet again for opening up fake customer accounts?

(4) The Federal Reserve Is an Enemy of Small Banks and Small Business

One of the most important trends in banking over the last four decades is . . .

Read the whole thing.

Written by Leisureguy

22 April 2020 at 4:02 pm

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