Why exactly are big banks bad

One, the concerned bank becomes less profitable because it has to use some of its profits from other loans to make up for the loss on the bad loans. Two, it becomes more risk-averse. In other words, its officials hesitate from extending loans to business ventures that may remotely appear risky for the fear of aggravating an already high level of non-performing assets or NPAs. In a big way, this was a result of the RBI requiring banks to clearly recognise the bad loans on their books.

The fact is several banks had witnessed progressive souring of their loans portfolio since the global financial crisis of But with each passing year, NPAs continued to mount — not helped by the fact that the economy itself started to lose its growth momentum since the start of When the assets are sold , with the help of IDRCL, , the commercial banks will be paid back the rest.

If the bad bank is unable to sell the bad loan, or has to sell it at a loss, then the government guarantee will be invoked and the difference between what the commercial bank was supposed to get and what the bad bank was able to raise will be paid from the Rs 30, crore that has been provided by the government. From the perspective of a commercial bank saddled with high NPA levels, it will help. Meanwhile, it can start lending again. From the perspective of the government and the taxpayer, the situation is a little more muddled.

The only sustainable solution is to improve the lending operation in PSBs. Lastly, the plan of bailing out commercial banks will collapse if the bad bank is unable to sell such impaired assets in the market. If that happens, guess who will have to bail out the bad bank itself? Indeed, the taxpayer. Click here to join our channel indianexpress and stay updated with the latest headlines. Why was the need felt, how will the two entities work, and to what extent does it help? There are differences, of course.

And, strangely, it is not the power of big finance to control everything that has us worried — except maybe in some movies. Even the supporters of our existing financial structure — men like former Treasury Secretary Henry M.

Paulson Jr. Rather it was the latest, and scariest, in a series of regular global crises going back at least to the s. At the heart of this pattern of behavior is a perception of invincibility among the folks who run our biggest banks — and following our most recent crisis they act more assured than ever that the government will provide a backstop. Even the Federal Reserve, which has fallen on hard and embarrassing times since it was captured by Big Finance during the s, now has its leading officials give speeches to this effect.

But this notion of a resolution authority that can handle massive banks is a complete unicorn , a mythical beast with magical powers that does not really exist. A United States-run resolution authority does nothing to help handle the failure of international banks; there is no cross-border resolution authority, nor will there be one anytime soon.

If a Citibank or a JPMorgan Chase or a Goldman Sachs were to fail, our government would be in exactly the same awkward position as it was in September and October Big banks cannot be reined in through some clever tweaking of the rules.

The issue before us is intensely political, just as it was in the first decade of the 20th century. There is again a confrontation between concentrated financial power and our democracy. One side will win and the other side will lose.

The banks start with a definite edge. The Senate legislation expected this week or next will achieve nothing, except make the stakes clearer and the motivations more transparent.

If the banks win this round, as seems likely, they will become even larger — and more dangerous.