JPMorgan Chase … maybe you’ve heard of it? If it was a country, it would have the Bigger than Brazil. Bigger than the Canada. Bigger than Russia. Hi. I’m Justin Johnson from Attapulgus, GA and I’ve always wondered The five biggest banks in the U.S. hold almost half the assets of the country’s entire banking industry — more than $7 trillion. So how did we get these giants? ‘Cause it wasn’t always this way. I paid a visit to Frederic Mishkin. He’s a professor of banking and financial institutions at Columbia Business School. He literally wrote the book on banking and finance. Literally, he wrote, like, five textbooks. Well over a million students have used the book. Yeah, I have. I’m one of them. Oh, good! In the ’20s, we had 30,000 banks in the U.S. By the ’70s and ’80s, we had about 15,000. And today we have about 5,000. Now nobody’s saying that we lived in a bank utopia back then, OK? We had a lot of banks, yes. But they actually… they kinda sucked. Even though there were all these thousands of banks, they weren’t actually competing against each other. They weren’t allowed to. State laws said you could only operate in one state at a time. Some states had laws saying you could only have one branch in the whole state. Why did they have these laws? ’Cause banks had lobbied for them. This actually was a way for banks to not be as competitive, and when you’re not as competitive, you actually can basically not give the consumer as good a deal. And particularly if you’re a bank in one state, you don’t want to have people from other states come in and take away some of your business. So you’ll fight like hell to keep them out.” So what changed? Well, over the ’70s and ’80s, the argument that consumers would benefit from more competition between banks started to gain traction. And it became clear that having too many local banks was risky. Local banks depend on local economies, and local economies fail. Texas, for example, in the ’80s was dependent on oil. When the price of oil fell, the economy there suffered and hundreds of banks went under. Then in the ’90s, the federal government stepped in and said, Yeah, we’re gonna allow interstate banking. We’re gonna allow one bank to buy up another bank. We’re gonna allow one bank to operate in more than one state. And that’s what they did. We’d like the government to always act in our interest, but frequently if there’s very powerful businesses, they can actually get the government to do their bidding. And in this case sometimes restrict competition. So as these banks are getting bigger and bigger and bigger, we start hearing the phrase It doesn’t mean that they’re too big to actually fail. They can totally fail. The problem is if they do, it would be a catastrophic disaster. And it was. If you let them go under, you have a crisis. But on the other hand, if you always are going to rescue them, then it makes it more likely to take risks that can create a crisis. And if everyone knows that the government will step in if something goes wrong, then people are less likely to pay attention to what that institution is doing. So the result is that you need to think about deciding either not to bail them out at all, which I think we realized is going to be problematic, particularly after Lehman Brothers. Or alternatively, yes there is this bailout that we’re going to do in the future, but we know then that we actually have to go in and regulate them — go in and check their books to make sure that they’re taking on less risk. So how did banks get “too big to fail?” Well, we started with banks that were too small to not be terrible. They were isolated and not very competitive. So we let them compete. We allowed them to merge with other financial institutions, and they did. Every time there was a crisis or a bank failed, another bank gobbled it up. They got bigger and bigger and bigger. And so here we are… With banks as big as countries and getting larger all the time.