Three years after bailing out one of America’s, and indeed the world’s biggest banks; Citigroup, “too big to fail banks” were back on the senate’s agenda last week when senator for Ohio, Sherrod Brown, presented his case to the Senate Subcommittee on Financial Institutions and Consumer Protection. In April 2010, Brown, alongside fellow Democratic Senator Ted Kaufman sponsored a failed measure proposing the attenuation of the United States’ “megabanks” and last week reiterated his desire to break up the monopoly of what he describes as the indestructible Wall Street Behemoths (Keoun & Ivry, 2011). Brown suggests that the largest banks in America are currently in a situation by which they cannot be allowed to fail as the results would be too catastrophic for the economy to handle, as such the government will always intervene, or bailout, these banks at the prolonged expense of the tax payer. This notion clearly relates to the aforementioned bailout of Citigroup, and that of Bank of America in 2009 (BBC News, 2009; Kiviate, 2008; Propublica, 2010).
In comparison to the United States, Lydia Prieg suggests that the United Kingdom is even more exposed to the banking sector; financial sector assets in relation to GDP are higher in Britain than in the US, Canada, France and Germany. Prieg furthers her claim of British exposure when she writes “In 2009 , the UK pledged 101% of UK GDP in support of the banking sector, in comparison to the US's 42% of GDP, Germany's 27% of GDP, and Japan's 21% of GDP” (Prieg, 2011). The pledged support mentioned, surpassing the UK’s GDP IN 2009, was accumulated in the bailing out of several British banks in 2008. Firstly, the February nationalisation of Northern Rock, followed seven months later by the recuse of Bradford and Bingley in September, and finally only two weeks later in October, the decision to inject a combined total of £37bn into the Royal Bank of Scotland, HBOS and Lloyds TSB in order to prevent the British banking system from imploding (The Telegraph, 2009).
When analysing these bailouts and those of the American banks we understand one thing; all had retail banking components, and as such are responsible for the management of millions of the general public’s bank accounts. By owning such a large share of the market, Brown and Prieg suggest these banks were too big to be allowed to fail by government. But the billion dollar bailouts did not become a necessity due to the actions of retail bank managers in Memphis or Macclesfield, instead they were required as a result of the very same banks’ investment activities. This style of casino banking; taking from the retail hand to feed the investment hand’s reckless gambling, has come under great scrutiny throughout the banking crises and has led to great support for the ring-fencing of the retail and investment sectors, if not total separation (Today, 2009; Prieg, 2011).
However, it is worth noting that one key bank involved in the banking crises did not have a retail arm; Lehman Brothers collapse in 2008 instigated the sale of Merill Lynch to Bank of America, resulting one year later in the Bank of America bailout (BBC News, 2008). This incestuous description of retail and investment banking exemplifies the reasoning behind calls to cap the sizes of all banks as called for by Senator Brown and Lydia Prieg.
In conclusion, we can see of the various banks discussed, those involved in retail and investment banking mutually, have not been allowed to fail by either the American or British government, saved by taxpayers money in order protect the banking system, as well as the taxpayers themselves. However, Lehmann Brothers, the fourth largest investment bank in the United States in 2008 was not saved, with the repercussions spreading in to every aspect of finance, including the protected retail banking sector. This would suggest that whilst some banks were understood to be too big to fail, such as Citigroup in the US, and Northern Rock in the UK, some banks, such as Lehmann brothers, were simply too big for the economy.
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