According to the Federal Deposit Insurance Corp., banks in 2012 had their most profitable year since 2006 and their second most profitable year ever. Banks made nearly $35 billion in the fourth quarter of last year, bringing their yearly total to more than $141 billion:

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported aggregate net income of $34.7 billion in the fourth quarter of 2012, a $9.3 billion (36.9 percent) improvement from the $25.3 billion in profits the industry reported in the fourth quarter of 2011. This is the 14th quarter in a row that earnings have registered a year-over-year increase. Increased noninterest income and lower provisions for loan losses continued to account for most of the year-over-year improvement in earnings. For the full year, industry earnings totaled $141.3 billion — a 19.3 percent improvement over 2011 and the second-highest ever reported by the industry after the $145.2 billion earned in 2006.

Wall Street bonuses, while not attaining the same heights to which they rose in 2006, also increased last year. Despite their high profitability, banks are still trying to circumvent or water down the Dodd-Frank financial reform law, claiming that it will undermine their ability to do business. Overall, the financial sector sucks $635 billion out of the economy every year that could be spent on more productive uses.

During a Senate Banking committee hearing on Tuesday, Sen. Elizabeth Warren (D-MA) grilled Federal Reserve Chairman Ben Bernanke on whether Wall Street banks should have to pay back U.S. taxpayers for the implicit funding advantage those banks receive by virtue of being viewed as “too big to fail.” According to a Bloomberg News study, big banks are essentially subsidized by about $83 billion per year because investors anticipate that those banks will be saved by the government if they get in trouble.

“These big financial institutions are getting cheaper borrowing to the tune of $83 billion in a single year simply because people believe the government would step up and bail them out. If they are getting it, why shouldn’t they pay for it?” asked Warren:

WARREN: So I understand that we’re all trying to get to the end of “too big to fail.” But my question, Mr. chairman, is until we do, should those biggest financial institutions be repaying the American taxpayer that $83 billion subsidy that they are getting?…It is working like an insurance policy. Ordinary folks pay for homeowners insurance. Ordinary folks pay for car insurance. And these big financial institutions are getting cheaper borrowing to the tune of $83 billion in a single year simply because people believe that the government would step in and bail them out. And I’m just saying, if they are getting it, why shouldn’t they pay for it?

BERNANKE: I think we should get rid of it.

Watch it:

As Bloomberg found, the biggest banks wouldn’t even be profitable without the expectation that they would be rescued by the government. “The banks occupying the commanding heights of the U.S. financial industry — with almost $9 trillion in assets, more than half the size of the U.S. economy — would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders,” Bloomberg noted.

Already, the biggest banks in the U.S. are huge. The largest 0.2 percent of institutions — just 12 mega-banks — control 69 percent of total bank assets. The 20 biggest banks hold assets equal to 84.5 percent of the nation’s entire economic output.

And if the U.S. accounted for bank assets (and risk) in the same way that European countries do, the problem would look even worse:

U.S. accounting rules allow banks to record a smaller portion of their derivatives than European peers and keep most mortgage-linked bonds off their books. That can underestimate the risks firms face and affect how much capital they need.

Using international standards for derivatives and consolidating mortgage securitizations, JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. would double in assets, while Citigroup Inc. would jump 60 percent, third- quarter data show. JPMorgan would swell to $4.5 trillion from $2.3 trillion, leapfrogging London-based HSBC Holdings Plc and Deutsche Bank AG, each with about $2.7 trillion.

JPMorgan, Bank of America and Citigroup would become the world’s three largest banks and Wells Fargo the sixth-biggest. Their combined assets of $14.7 trillion would equal 93 percent of U.S. gross domestic product last year, the data show. Total assets of the country’s banking system would be 170 percent of economic output, still lower than 326 percent for Germany.

Several members of Congress, from both sides of the aisle, have wondered recently why the biggest banks aren’t being broken up, since they’re “too big to fail,” “too big to jail,” and even “too big for trial.” “Glass-Steagall [which separated commercial and investment banking] was put in place in 1933 to prevent exactly what happened to us. It was in place, I think for approximately 66 years, until it was repealed,” noted Sen. Joe Manchin (D-WV) last week. “If it worked so well for so many years why do you all not believe that it’s something we should return to or look at?”

As Demos noted in a recent report, the financial sector sucks $635 billion out of the economy every year that could otherwise go to more productive uses, while creating behemoths that put the entire economy at risk. “These banks are not just too big to fail, they’re too big to manage,” said Sen. Sherrod Brown (D-OH). “I think these banks will be stronger and healthier and probably more profitable if they’re smaller.”

Last week, Sen. Elizabeth Warren (D-MA) gained a deserved amount of attention for grilling bank regulators on whether the nation’s biggest financial firms have become “too big for trial.” But she wasn’t the only one chasing regulators for answers on how to rein in the nation’s banking behemoths.

Sen. Joe Manchin (D-WV) wanted to know why regulators aren’t looking at reimplementing a wall between traditional commercial banking and risky investment banking like the Depression-era Glass-Steagall law. “If it worked so well for so many years why do you all not believe that it’s something we should return to or look at?” Manchin asked:

Glass-Steagall was put in place in 1933 to prevent exactly what happened to us. It was in place, I think for approximately 66 years, until it was repealed. Up until the 70s, it worked pretty well. We start seeing some changes and chipping away with new rules that took some powers away from Glass-Steagall. And then we finally repeal in 1999 and the collapse in 2008. The Volcker Rule, and I know it doesn’t do what the Glass-Steagall does, why wouldn’t we have those protections? If it worked so well for so many years why do you all not believe that it’s something we should return to or look at?

Watch it:

Federal Reserve Board governor Daniel Tarullo, while not endorsing a return to Glass-Steagall, did admit that “the mistake lay in not substituting a new, more robust set of structures and measures that could take account of the intertwining of conventional lending with capital markets. That process of pulling away old regulations, but not putting in place new, modernized, responsive regulation, I think that’s what left us vulnerable.” Tarullo has previously called for limiting banks’ size to a certain percentage of the economy.

Currently, the largest 0.2 percent of banks (just 12 institutions) control 69 percent of bank assets. As Demos noted in a report, the financial sector sucks $635 billion every year out of the economy that could otherwise go to more productive uses.

Manchin is hardly alone in calling for a re-examination of whether the biggest banks need to be so big. “These banks are not just too big to fail, they’re too big to manage,” said Sen. Sherrod Brown (D-OH) told ThinkProgress. “I think these banks will be stronger and healthier and probably more profitable if they’re smaller.”

Massachusetts Sen. Elizabeth Warren (D) used her debut on the Senate Banking Committee to question financial regulators about the lack of accountability for Wall Street banks’ role in the financial crisis, challenging them to name the last time a Wall Street bank was taken to trial over allegations of fraud and other crimes instead of being allowed to settle out of court.

“What I’d like to know is, tell me a little bit about the last few times you’ve taken the biggest financial institutions on Wall Street all the way to a trial,” Warren asked the regulators. But none provided a specific answer. That led Warren to wonder if Wall Street banks had become “too big for trial”:

WARREN: I just want to note on this: there are district attorneys and U.S. Attorneys who are out there every day squeezing ordinary citizens on sometimes very thin grounds and taking them to trial in order to make an example, as they put it. I’m really concerned that “too big to fail” has become “too big for trial.”

Watch it (at 3:50):

Prosecution of financial fraud hit a 20-year low in 2011, even amid broad findings of fraud that took place at the biggest banks. The government has instead reached settlements over mortgage and foreclosure fraud, and other alleged crimes with a multitude of banks, and while those settlements are significant, they have also been plagued with problems. And as Warren noted, settling out of court has also prevented the public from “days of testimony” from banking officials that would result from trials.

Though Warren came to the Senate with a reputation for being tough on banks, she is hardly alone in her criticism of the lack of legal action that has been taken against them. Iowa Sen. Chuck Grassley (R-IA) blasted the “get-out-of-jail-free card” the banks seem to hold, and he and Sen. Sherrod Brown (D-OH) petitioned the Justice Department last month over concerns that big banks had become “too big to jail.”

During a mostly uneventful confirmation hearing today, Jack Lew, President Obama’s nominee for Treasury Secretary, revived the idea of implementing a Financial Crisis Responsibility Fee. The fee, meant to be applied to the nation’s biggest banks for their role in the 2008 financial crisis, was proposed by the administration in 2010, but went nowhere.

During a discussion with Sen. Sherrod Brown (D-OH0, Lew suggested the fee as a possible remedy for banks that are too-big-to-fail:

BROWN: Don’t you think it’s unfair for these banks, $2 trillion banks in at least a couple of cases, these megabanks to receive government subsidized funding advantages that community banks in West Akron or Pomeroy or Sycamore, Ohio don’t get?

LEW: Senator, the administration has proposed a financial responsibility fee that would fall on those large banks, which is something that we think is the right way to assess responsibility for past burdens put on taxpayers. In terms of the access to different borrowing windows, I’d be happy to follow up with you on the differences between access and community banks and large money center banks. But in general, our view is that we have to distinguish between the large banks that create risk to the system and smaller institutions that are less likely to. And we’ve tried to put less burdens on the smaller banks.

Watch it:

The administration has framed this fee from the beginning as only useful in order to recoup losses from the financial crisis. But it would be extremely useful as a permanent fee on the biggest banks for two reasons: it would mitigate some of the advantages enjoyed by the biggest firms and would raise needed revenue from a sector of the economy that can afford it.

As Minneapolis Federal Reserve President Narayana Kocherlakota noted, a bank tax has the benefit requiring huge banks to internalize some of the cost of their extreme growth and risky activities. “Financial institutions fail to internalize all the risks that their investment decisions impose on society. Economists would say that bailouts thereby create a risk ‘externality.’ There is nearly a century of economic thought about how to deal with externalities of various sorts — and the usual answer is through taxation,” he said. “Taxes are a good response because they create incentives for firms to internalize the costs that would otherwise be external.”

Rep. Dan Campbell (R-CA), in a smart move, wants to require the biggest banks to hold more capital against potential losses (meaning they have a bigger cushion, and thus less potential need for a bailout, if the economy goes south). However, he plans to pair his legislative push for higher capital requirements with the repeal of two other important parts of the Dodd-Frank financial reform law:

U.S. Representative John Campbell plans to offer legislation aimed at reducing the size of “too- big-to-fail” banks by requiring them to hold more capital including long-term debt. [...]

His legislation would also repeal Dodd-Frank’s heightened standards for systemic institutions and its ban on proprietary trading, known as the Volcker rule. Campbell said that with additional capital requirements, a ban on proprietary trading would be unnecessary.

The first measure Campbell wants to repeal allows regulators to place more stringent regulations on the biggest banks, making them adhere to even stricter requirements than their competitors that are small enough to be allowed to fail. The GOP has wanted to do away with this provision for years, which amounts to ignoring the problem of too-big-to-fail, not mitigating it.

Campbell’s bill would also repeal the Volcker Rule, which is meant to prevent the biggest banks from engaging in trading for their own benefit taxpayer-backed dollars. Congressional Republicans have done the bidding of the financial services industry by watering this rule down to a shell of its former self, but it still would help reduce some of the risky practices that contributed to the financial crisis.

A bipartisan duo of senators sent a letter to the Department of Justice today to press Attorney General Eric Holder on the lack of prosecutions for employees and executives of the nation’s largest banks in the wake of financial crisis. The letter from Sens. Sherrod Brown (D-OH) and Chuck Grassley (R-IA) questioned Holder about “whether the ‘too big to fail’ status of certain Wall Street megabanks undermines the ability of the federal government to prosecute wrongdoing and impose appropriate penalties.”

“Wall Street megabanks aren’t just too big to fail, they’re increasingly too big to jail,” Brown said in a release. “Already, the nation’s six largest megabanks enjoy what amounts to taxpayer-funded guarantee by virtue of their size, making it harder for regional and community banks to compete. Now, these megabanks may also enjoy some impunity when they violate the law by laundering money or illegally foreclosing on homeowners. Wall Street should pay the full price of its wrongdoing, not pass the costs along to taxpayers.”

“Unfortunately, we’ve seen little willingness to charge these individuals criminally,” Grassley added. “The public deserves an explanation of how the Justice Department arrives at these decisions.”

Last month, Grassley criticized the “get out of jail free card” that has been given to the nation’s largest financial institutions, which have largely avoided serious prosecution since the financial crisis. Prosecutions for financial fraud hit a 20-year low in 2011. Many of the fines the banks have paid are tax-deductible, a problem Brown is currently seeking to remedy.

“Unfortunately, many of the settlements between large financial institutions and the federal government involve penalties that are disproportionately low, both in relation to the profits which resulted from those wrongful actions as well as in relation to the costs imposed upon consumers, investors, and the market,” Grassley and Brown wrote in the letter, adding that the perception that large banks are too big to face real prosecution “undermines the public’s confidence in our institutions and in the principal that the law is applied equally in all cases.”

According to a new report from the National Consumer Law Center, jobless Americans are being forced to pay millions of dollars in unnecessary fees to big banks in order to access their unemployment insurance benefits. Several states do not give beneficiaries the option of having their benefits deposited directly into their bank accounts, forcing them to instead use prepaid debt cards, which come along with a host of fees and surcharges.

As the Associated press noted, the nation’s biggest banks make a killing under this system:

Banks including JPMorgan Chase & Co., U.S. Bancorp and Bank of America Corp. seized on government payments as a business opportunity. They pitched card programs to states as a win-win: States would save millions in overhead costs because the cards would be issued for free. And people without bank accounts would avoid the big fees charged by storefront check cashers.

However, most of the people being hit with fees already have bank accounts. The bank-state partnerships effectively shifted the cost of distributing payments from governments to individuals. The money needed to cover those costs is deducted from people’s unemployment benefits in the form of fees.

Big banks have also racked up huge profits administering food stamp programs. As the NCLC noted, “Even well-designed prepaid cards impose costs on workers, though the price is likely lower than the cost of cashing paper checks. In California, which continues to have the best card in our survey, workers paid nearly $1.8 million in fees in the past year, not including ATM surcharges. Thus, offering workers the choice of direct deposit remains important even for prepaid cards with the fewest fees.”

As the nation slowly ground its way out of the Great Recession, the biggest banks in the country (whose malfeasance played a large role in creating the downturn) grew even larger. According to data from the Dallas Federal Reserve, the largest 0.2 percent of all banks now control nearly 70 percent of all banking assets:

As of third quarter 2012, there were approximately 5,600 commercial banking organizations in the U.S. The bulk of these—roughly 5,500—were community banks with assets of less than $10 billion. These community-focused organizations accounted for 98.6 percent of all banks but only 12 percent of total industry assets. Another group numbering nearly 70 banking organizations—with assets of between $10 billion and $250 billion—accounted for 1.2 percent of banks, while controlling 19 percent of industry assets. The remaining group, the megabanks—with assets of between $250 billion and $2.3 trillion—was made up of a mere 12 institutions. These dozen behemoths accounted for roughly 0.2 percent of all banks, but they held 69 percent of industry assets.

The Dallas Fed, led by Richard Fisher, has consistently called for the largest banks to be broken up, as have some lawmakers. “These banks are not just too big to fail, they’re too big to manage,” said Sen. Sherrod Brown (D-OH). “I think these banks will be stronger and healthier and probably more profitable if they’re smaller.”

Instead of breaking up the biggest banks, the Dodd-Frank financial reform law of 2010 attempts to wall off some of the riskiest activities in which mega-banks engage and lays out a process for unwinding failing financial firms without resorting to ad hoc bailouts. Banks are looking to water down or circumvent the former (and may sue if they don’t get their way), while House Republicans have made a concerted effort to repeal the latter. (HT: Zero Hedge)