by The Compliance Exchange on April 19, 2012
From New York Times:
Goldman Sachs is still growing. Does that mean financial reform is proving a big fail on the too big to fail question?
Goldman, in reporting its first-quarter results on Tuesday, said its balance sheet had $951 billion of assets at the end of March. That’s 7.6 percent higher than the level at the end of 2008. Goldman has been able to grow since the financial crisis, despite facing new, more stringent regulations, many of which are intended to make it inconvenient and expensive for banks to bulk up their balance sheets.
Morgan Stanley, which reports earnings on Thursday, had $750 billion of assets at the end of 2011, which is 14 percent higher than in 2008.
Other large banks, like JPMorgan Chase and Wells Fargo, have also grown a lot since the crisis, but that’s mainly because they acquired large ailing banks, like Bear Stearns, Washington Mutual and Wachovia. Since 2008, assets at JPMorgan Chase’s investment bank are actually down 5 percent.
What to make of the growth?
One camp of reformers is O.K. with the fact that Goldman has more assets than in 2008, because the bank has increased its capital over that period, making it more resistant to losses and market shocks. It also has less hard-to-sell, hard-to-value assets, and more liquid securities. They’d also note that balance sheets at both Morgan Stanley and Goldman are quite a bit smaller than their peak levels before the financial crisis.
For others size is critical. Even if a bank has higher capital and better quality assets, it can still be subject to a run, and if it’s huge, the taxpayer would have to step in to save it. They say the government should force banks to be made small enough to fail without bringing down the system.
A middle camp fuses the two approaches. It wants banks to be smaller over time, but it expects tougher regulations will surely, but gradually, cause that over time. For instance, once banks have to hold much higher capital against illiquid bonds and derivatives they’ll be quick to dispense with them. This is expected to happen once global bank regulations –known as the Basel III rules – come into effect over the next few years.
The hardliners say that it’s naïve to expect capital-based regulations alone to reduce the size of banks substantially. That’s a little unfair, because new capital rules haven’t had a chance to show their effect.
Banks aren’t shrinking. But nor is the anger behind the too-big-to-fail bailouts.