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US Banking System: Changes Coming?

Posted on September 15 By Justin McHood

In the last year and a half, the US Banking system has been in crisis - and at least some people claim that the entire system is worse off now than it was before the crisis.

The main culprit?

If you thought that some banks were too big to fail before the crisis, now we really have banks that are too big to fail. According to Joseph Stiglitz, the Nobel Prize winning economist, the US has failed to fix the banking system and it is worse off now than before the crisis:

“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview yesterday in Paris. “The problems are worse than they were in 2007 before the crisis.”

But where one expert takes one stance, there is usually another who disagrees. According to Goldman Sachs' Chief Economist Jim O'Neill, Stiglitz is too pessimistic and the banking system will continue to get stronger.

“I’m not sure why he’s saying it,” O’Neill told Bloomberg Television today. “The banks were close to near death. We’ve been to hell and back, so to speak, and we’re on the road to recovery.”

Regardless if you think that the US economy is turning the corner or not, one thing is clear - the big banks have gotten bigger and the regulatory environment hasn't yet caught up to address the problems. Should the big banks be regulated differently than the smaller ones?

Currently, the Obama administration wants to identify a handful of banks as “systemically important” and ensure that they are regulated differently - more strict - than smaller banks, but the plan does not attempt to downsize the big banks at all.

Are big banks bad?

Only if they can possibly topple a country - and if the current crisis has taught us nothing else, maybe one lesson has been that there may already be at least a few banks who can only really fail if the US Government does.

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