TOO-BIG-TO-FAIL BANKS MADE BIGGER BY BIDEN

SIX weeks into President Biden’s first major financial crisis, the White House’s approach is clear: make America’s biggest banks — “too big to fail” banks from 2008 — even bigger.

The result is bad for small businesses.

Three of America’s four biggest banks — JPMorgan Chase, Citigroup and Wells Fargo — reported last week what The Wall Street Journal called “blowout” earnings. Collectively, profits, at $22 billion, were a third higher than last year.

But aren’t we in a banking crisis? In March, the country experienced the second-largest bank failure ever, when the feds seized Silicon Valley Bank, the 20th-biggest bank, and its $175.4 billion in deposits. A week later, regulators seized smaller Signature Bank and its $89 billion.

You’d think a banking crisis would not be great for banks. True: Consumers have pulled a half-trillion dollars from the country’s bank-deposit base this year, shrinking deposits by nearly 3%.

Yet the biggest banks have benefited. Even as people and businesses have withdrawn their money from banks overall, they’ve

increased the money they keep at the biggest banks. JPMorgan Chase and Citigroup saw deposits rise by $80 billion, and Wells Fargo saw an increase, too.

Why? Federal bank-deposit insurance only guarantees your first $250,000 in an account if your bank fails. So businesses and people with money in the bank exceeding this limit are nervous about keeping those funds anywhere but at the biggest banks.

But why would they be? The Federal Deposit Insurance Corp. limit isn’t higher at JPMorgan Chase than at your corner bank. If JPMorgan fails tomorrow and you’ve got several million dollars in savings there, you’re just as out of luck.

But wealthy individuals and execs don’t see it that way. They think it’s inconceivable the government would let JPMorgan (or Citi or Wells or Bank of America) fail. That’s because the government bailed these banks out in the 2008 financial crisis. Back then, both Citi and BofA needed tailored bailouts.

Dodd-Frank, the 13-year-old law that was supposed to “put a stop to taxpayer bailouts once and for all,” as then-President Barack Obama put it, never did any such thing. All Dodd-Frank did was put big banks under constant supervision — so they won’t fail.

But the government can never know every aspect of a bank’s operations. The Federal Reserve was scrutinizing Silicon Valley Bank and identified serious problems with its risk management nearly two years ago.

Yet the regulators did . . . nothing. It took the free market — bank depositors sniffing out information and acting on that information, yanking their money — to reveal SVB’s deficiencies to the world.

After SVB and Signature failed, regulators experienced panic of their own, quickly suspending their rules and offering all depositors at the two banks insurance, above $250,000, after the fact. This was supposed to stem the outflow from other medium-sized banks to the biggest banks. But it didn’t work.

Absent adherence to a rule, customers at other banks have no idea how big their bank must be for them to receive full deposit insurance. And what if regulators change their minds and refrain from making good on all deposits should another midsized bank fail? Safer to stick with the biggest.

That’s how the nation’s four biggest banks nearly quadrupled their deposits since 2007, before the financial crisis, from a collective $1.6 trillion to more than $6.1 trillion now — a third of all deposits in the country, up from fewer than a quarter.

These two medium-sized-bank failures represent the first test of Dodd-Frank, and what have they proven? The government is scared to use its own post-crisis laws; it immediately resorts to bailouts.

Big banks’ too-big-to-fail advantage builds on itself. Right now, small banks have to offer much higher interest rates to attract deposits, to compensate for higher risk. This means smaller banks have less money to loan to small businesses, and they’ll have to charge higher interest rates.

A monolith of big banks is bad for small businesses in other ways. Big banks make decisions based on algorithms.

Big banks have their place, but small businesses need the option of going to a local institution, one whose lending officers have a feel for whether to offer somebody with a limited credit record money to open a restaurant or a store, based on their understanding of whether a specific plan might work in a particular location.

Then there’s the long-term risk: Someday, a big bank will start to fail. What will Biden do?

‘The result is bad for small businesses.’