The Bankers’ New Clothes

Made from Whole Cloth

Since the 2008 financial panic, bankers have lobbied lawmakers and the public against serious reform of the taxpayer-rescued and once-again profitable financial industry. They blame the crisis on a “fluke” – a one-off occurrence – and advocate against stricter regulations that would, according to them, have “unintended consequences,” like stalled economic growth and increased consumer costs. The bankers threaten to curb lending if Congress sets new rules that would force them to borrow less and increase capital. They predict economic ruin if regulators impose measures to ensure financial stability.

Bank executives claim that banking differs from every other industry, and that’s true: Banks finance more than 90% of their assets through debt. Other industries generally borrow less than 50%. Corporations bolster their equity by retaining earnings and issuing shares. Banks avoid expensive equity markets and rely on cheaper debt. They realize this bargain because creditors know that large financial institutions that are seen as too big to fail will get government help in bad times. Banks may save by borrowing, but taxpayers ultimately pay the bill ...