Since the 2008 financial crisis, rating agencies, regulators, global organizations, and academics have argued that large banks receive significant competitive advantages because the market still perceives them as likely to be saved in a future financial crisis. Therefore, not only do the largest banks enjoy the economic safety benefits of being large and diversified, but they also receive implicit as well as explicit and direct government subsidies. The most significant subsidy, an implicit one, stems from market perception that the government will not allow the largest banks to fail—i.e., that they are “too-big-to-fail” (“TBTF”)—enabling them to borrow at lower interest rates. Focusing on these subsidies, recent media reports sent shockwaves across financial markets by estimating the value of the financial advantages for the six largest U.S. banks since the start of 2009 at $102 billion. On November 14, 2013, the Government Accounting Office (“GAO”) issued the first of two reports on the benefits large banks receive because of their size. A less obvious yet highly-related issue is large banks’ exemptions from criminal statutes. This issue was not mentioned in the 2013 report, but should be included in the 2014 report that will examine the economic advantages the largest banks receive because of implied government support. Specifically, in this Commentary, I argue that this exemption contributes to the subsidies’ economic value while also creating incentives for unethical and even criminal activity.
Before analyzing the elements of such exemptions, it is critical to first understand large banks’ subsidies framework in which such a benefit exists. The 2013 report was the result of a highly controversial debate on the existence and nature of such subsidies, especially following the enactment of the Dodd-Frank Act, but there is still disagreement as to whether large banks actually receive any subsidies. Certain commentators argue that large banks deserve different treatment because they create benefits for businesses that would not be available elsewhere; the banking field facilitates substantial scale economies, which make large banks a source of gains for society that justify Congress’s support. Therefore, they essentially argued that the largest banks are unique and worth protecting because they leverage revenue and cost synergies through economies of scale, and as a result create benefits, that pass on to their customers and investors and lower the costs of finance for the entire society.
One of the benefits large banks receive is a non-monetary semi-exemption from criminal statutes that contributes to their subsidies value. Indeed, the Department of Justice (“DOJ”) allows for “deferred prosecution” and advances settlements instead of criminal charges for large financial institutions when they violate criminal laws such as money laundering and drug trafficking. This semi-immunity policy, nicknamed “too-big-to-jail,” also translates into an additional economic advantage that only the largest banks enjoy.