Big Banks Worried About Fiscal Cliff for Good Reason

Bank CEOs want a fast solution to the fiscal cliff. Here's why.

The so-called "fiscal cliff" is the topic of conversation between President Obama and labor leaders this week.
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Today, the heads of the nation's big banks added their voices to the chorus asking Washington to steer away from the fiscal cliff. They did so with good reason: Banks may be some of the most vulnerable businesses around if lawmakers fail to avoid the tax hikes and spending cuts scheduled to hit at the end of the year, say some experts.

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"The consequences of inaction—for stability in global financial markets, for economic growth, for millions of Americans still without work, and for the financial circumstances of American businesses and households—would be very grave," reads the letter from the Financial Services Forum, a trade group representing the finance industry. The missive bears the signatures of banking titans such as Bank of America CEO Brian Moynihan, Goldman Sachs CEO Lloyd Blankfein, JPMorgan Chase CEO Jamie Dimon and other finance and insurance company CEOs.

Congressional Budget Office Director Doug Elmendorf and Federal Reserve Chairman Ben Bernanke have told Congress about the implications of going over the cliff, and business leaders have expressed their worries in interviews and surveys. But bankers in particular may have reason to fear.

"I think they're more vulnerable than anything else," says Doug Roberts, managing principal at Channel Capital Research. "If you look at how they operate on a couple of levels, they're more vulnerable than say other companies are on the fiscal cliff."

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The CBO projects that the fiscal cliff could send the country into recession in 2013 and send the jobless rate over 9 percent again. Roberts explains that pushing even more people out of work and depressing the economy further at a time when it's already weak could mean a wave of late payments on loans, or even defaults, meaning a rough road ahead for banks.

"At that point it doesn't matter how low your mortgage rate is," Roberts says. People without jobs can't pay their bills, after all. The fact that some businesses are already pulling back during a time of uncertainty adds another layer of urgency to the bankers' letter, says Roberts.

He adds that simply avoiding the fiscal cliff by "kicking the can down the road"—that is, by proposing an only months-long fix—will only help so much.

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"It doesn't create the environment where people will expand, kind of go out and do things," says Roberts. That environment would be bad for businesses of any kind.

The finance industry agrees. In the forum's letter, they warned lawmakers and the president that "merely avoiding the fiscal cliff is not enough. We further urge you and your colleagues to enact legislation that truly restores the nation's long-term fiscal soundness."

Of course, the repercussions of fiscal sustainability—or lack thereof—go well beyond 2013.

"This is all about the future and what could happen in the future. The best way to think about this is we're gambling," says Ron Haskins, a senior fellow in economic studies at the Brookings Institution.

The United States's borrowing costs are low now, he points out, but continuing on an unsustainable debt path could mean that the interest the country pays on its debt could skyrocket and make a bad situation even worse.

The Financial Services Forum points to this longer-term fear in their letter. They reference not only Standard & Poor's downgrade of its U.S. debt rating during last summer's debt ceiling debacle but a recent warning from Moody's that it would downgrade the U.S. credit rating if the government does not adopt policies that stabilize and eventually decrease the nation's federal debt-to-GDP ratio.

To simultaneously threaten the nation's good standing and economic growth, then, could be a particularly dangerous combination.

"I think banks have a particular reason to worry about our entire financial situation," says Haskins. "We are the world's basic financial system, and the dollar is the basis of the international system, and some people are questioning that. ... That would certainly have an impact on banks."