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Big Banks And the System: Are They ‘Too Big To Fail’ For Real?


The big banks are the heart of the global economy but also one of the greatest risks. With the economic crisis of 2008 they have been defined as “too big to fail”.

After all the events that have occurred since then, today we better understand this way of saying: the banks are always among the majority of subjects with serious economic problems, putting at risk, the health of the economy of a country.

On their side they have the strong support of central banks, which are at the same time the cause of their high risk profile.

The scenario appears portend the arrival of a new system shock ready to compete with the one in 2008, still fresh in everyone’s memory.

The international banking system is under stress because of the monetary policies adopted by central banks.

The central banks of the major world economies, in fact, are practicing interest rates very close to the zero or even equal or negative.

The big banks have thus lost control over the rates applied to credit, having to consistently adjust them according to the dictates of the central bank.

The result is a decrease of the net interest income for banks (less able to deal with any of the debtors’ default troubles), leading to a subsequent fall in the profit and solidity.

Competitiveness is high among big banks and others lending institution. The result is that every bank tries to become larger than the others, in order to generate more revenue and be able to benefit from higher commissions and to offer services at reduced prices.

Many companies which had previously borrowed large amounts of money from large banks now, in fact, prefer to go directly to the bond market, investment funds or private capital companies, which offer their most advantageous terms.

In addition to these problems, big banks have to face the burden of regulations, with new capital requirements and trading limits, both nationally and in accordance with the Basel Accords. This is having a dramatic impact on their revenues.

With the increase of the online banking platforms, many corporate customers are turning to other small competitive institutions. Therefore, the rules for large banks are changing, leaving them only the problems, and none of the benefits, linked to their large size.

The problem of big banks is thus essentially linked to their inability to generate revenue, or to do it in a way commensurate with their needs.

This situation is real if we take a look to the economic results that major American banks have achieved in the first quarter of 2016 (YoY).

JP Morgan has seen a decline in revenues of -16%, Bank of America recorded a decline in revenues -25%, Morgan Stanley reported a -53% and Goldman Sachs -59.9%.

It seems that big banks have never fully recovered from the great crisis of 2008.

The fact that they are still standing, however, makes think about their potential. After all, their work depends on risk and if to have a profit means to increase the risks then we can expect everything.

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