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US banks can get into trouble again!
Tue, 29 Jan Pre-Open

Many of the US banks failed in the past due to insufficient capital, inordinate size and reckless lending. However, there were a few big banks that were bailed out by the government. Allowing them to fail could have had a cascading effect on the economy. In other words, they were too big to fail. But allowing these banks to function in the system meant that the economy was not completely free of the toxic paper assets that created this trouble.

So, in order to fix this problem the Dodd-Frank Act was established. Its aim was to reform these banks. But it has hardly succeeded. In fact, former Federal Deposit Insurance Corporation (FDIC) chairman, Bill Isaac, feels that the US banks may land into trouble again. For one, the Dodd- Frank Act has not had the desired effect. Secondly, US banks' inordinate size makes the reform process all the more difficult. Right now, there are 5 to6 banks in US that control over half of the banking assets. Thus, they can't be allowed to fail as that would mean the entire banking system would collapse.

Being huge in size means they get funding at competitive rates. This allows them to grow even faster when, in fact, their operations have to be curtailed to cleanse the system. However, it can't be denied that the US banks are in a much better shape compared to what the situation was prior to the financial crisis. But Bill Isaac feels that these banks can get into trouble again and understandably so.

All the efforts to resurrect the system can go in vain if the individuals who are responsible for this aren't brought to books. In other words, there is no point blaming the banks. In fact, the big banks have become a scapegoat in this entire chaos. But they haven't done anything wrong. It's the people who run these banks that have done wrong. Thus, they should be blamed and brought to books rather than blaming the banks itself. For instance, in the 80's when financial crisis hit US the focus was to prosecute people and not banks. But this is not the case now. Right now, the law is trying to wash its hands by not putting the guilty individuals to books. While one cannot rule out some political motives behind this move at the end of the day it is the banking system and the economy that will have to pay a price for it.

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