What Does “Too Big to Fail” and “Too Big to Prosecute” Mean to Credit Unions?

By. Robbie Thompson, Credit Union Association of the Dakotas

During the last month or so, we’ve seen some compelling Congressional hearings about big banks, in particular about the size, power and complexity of our nation’s largest financial institutions. This caused me to reflect on a statement made by President Obama in January, 2010 when he said “[n]ever again will the American Taxpayer be held hostage by a bank that is ‘too big to fail’.”  Is that true?  Has there been a change in the makeup of our country’s financial institutions? Or are there even more advantages today to being one of the nation’s largest banks?  Did the more than $1 trillion in loans granted by the Fed to Wall Street banks actually help make the country’s biggest banks even bigger and willing to take even more risks?  Are these large banks doing even more to leverage their “too big to fail” status?

I’d like to share a few statistics with you as well as some of the highlights of the recent congressional testimony and let you decide.  But even more importantly, what does this mean to credit unions?  How do we operate based on this information? What can we do differently in-light of this to ensure our relevance? Please feel free to think about this and put give your comments and thoughts.

  • Today the top 0.2 percent of banks – 12 really big banks – control 69 percent of total bank assets in the U.S.
  • The 20 biggest banks hold almost 85% of the nations entire economic output.
  • At the end of 2011, the five largest banks (JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs) held assets equal to 56% of the US economy, that is up from 43% five years earlier – before the financial crisis.

On February 14th of this year, during a Senate Banking Committee hearing, Freshman Senator Elizabeth Warren (D-MA) asked banking industry supervisors and in particular the OCC, “When was that last time you took a Wall Street Bank to trial.”  Not sanctions or enforcement actions, but actually to trial.  None of those regulators were able to recall bringing a Wall Street bank to trial.  Again, they cited enforcement activity and fines, but none were able to state when they last brought a Wall Street Bank to trial.  In response, Senator Warren stated that it seems that “Too big to fail has become too big for trial, and that just seems wrong”.


Warren continued her grilling of regulators, this time Treasury officials, about the idea of “too big for trial”.  Treasury officials were testifying before the Senate Banking Committee on March 7th regarding money laundering and were asked specifically about a recent enforcement action against HSBC.  HSBC recently admitted to laundering money to the tune of $881 million on behalf of drug cartels in Columbia and Mexico and admitted to violating U.S. sanctions for countries like Burma and Cuba.  Not only did they do this once; they were told to stop on repeated occasions and continued to do it and make profits.  HSBC eventually paid a fine. It was the largest fine ever levied by the Treasury Department.


However, no one was ever convicted of a crime or brought to trial.  Senator Warren asked regulators when (in their opinion) would money laundering by a financial institution reach a point where they would actually shut down a financial institution.  Regulators repeatedly seemed unable to give a direct answer to the question.  One regulator indicated that the there is no “bright line”, to which Senator Warren replied “It must be something above $881 million”.  Warren ended her questioning by stating that “If you get caught with an ounce of cocaine you will go to jail for years; if you do it repeatedly you may go to jail for life; but evidently if you launder close to a billion dollars and violate U.S sanctions, your company pays a fine and you go home and sleep in your own bed at night”.


This grilling came on the heels of U.S. Attorney General Attorney General Eric Holder confessing to the Senate Judiciary Committee on March 6th that a bank’s size may inhibit prosecution. When questioned by Senator Charles E. Grassley (R-Iowa) about the Justice Department not bringing criminal charges against HSBC for their pattern of non-compliance with anti-money laundering laws, Holder stated that although this may not have been the case with HSBC “[i]t does become difficult for us to prosecute when we are hit with indications that if we do. . . bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy”.  He added “It has an inhibiting influence, impact on our ability to bring resolutions that I think would be more appropriate.”


Does this mean that big banks can take even more risk because they don’t need to worry about criminal prosecution?

On February 26th during a Senate Banking Committee hearing, Senator Warren asked Federal Reserve Chairman Ben Bernanke about what she described as an $83 billion dollar taxpayer subsidy cited by Bloomberg from an IMF study in the form of cheaper borrowing that the largest “too big to fail” banks receive because of the perception that the government will not allow them to fail.


Chairman Bernanke simply said, “We should get rid of it.”  This subsidy is tantamount to the government giving banks about 3 cents of every tax dollar collected.  The top five banks account for $64B of that subsidy, which is equal to their typical annual profits.  So banks, with assets of almost half of the US economy, would only break even without this subsidy?  Banking Groups have since refuted this figure.


Warren also grilled Bernanke about why the rules to eliminate “too big to fail” have been so slow to be put in place, to which Bernanke replied “the rules take time to develop . . . we have a plan and we’re moving in the right direction… and over time we will see increasing market expectation that these institutions can fail”.

In the mean time, the biggest banks continue getting bigger; even more “too big to fail”; and “too big to bring to trial”. So what does all this mean to credit unions? Does it present opportunity or pose risk? What do credit unions and the industry potentially need to do different because of this increased size of the nation’s largest banks? Please put in your comments and I will try and summarize them all for a future story.

Robbie Thompson

Robbie Thompson

Thompson is responsible for the management and oversight of the Credit Union Association of the Dakotas, and in conjunction with the Board of Directors establishes and achieve the Association’s ... Web: www.cuad.coop Details