What Are Banks Doing in Energy and Aluminum Anyway? - Bloomberg
The largest U.S. banks are accused
of causing problems in markets ranging from energy to aluminum.
Regardless of whether they’re guilty of market-rigging, as critics say,
the charges raise another question: Why are the banks active in these
businesses in the first place?
Part of the answer is a point we’ve stressed before: They’re among the country’s most subsidized enterprises. The Federal Deposit Insurance Corp. and the Federal Reserve,
both backed by taxpayers, provide an explicit subsidy by ensuring that
banks can borrow money in times of market turmoil. Banks that are big
and connected enough to bring down the economy enjoy an added implicit
subsidy: Creditors will lend to them at low rates on the assumption that
the government won’t let them fail.
The subsidies arose because
banks perform a special public service. The lending they do and the
payments they process are crucial to the functioning of the economy.
Problem is, access to cheap, subsidized financing gives banks a big
advantage if they move into markets beyond their core business. That’s
great for the banks, but it distorts the competitive landscape.
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