Is It Time To Break Up The Big Banks?

There is a growing, bi-partisan movement on Capitol Hill to pass legislation to break up the big banks.  When was the last time that Democrats and Republicans worked in a bi-partisan fashion on anything?  But I digress. 

Former Federal Reserve Chairman Alan Greenspan said recently, “if push comes to shove… I would be in favor breaking up the banks.”  Conservative columnist George Will recently wrote a persuasive editorial urging conservatives to support legislation proposed by Ohio U.S. Senator Sherrod Brown (D) to break up the big banks.  Before we look at this proposed legislation, let’s look at the facts.

How many financial institutions are there in the U.S?  As of 2010, there were about 7,700 financial institutions with insured deposits from the Federal Deposit Insurance Corporation (FDIC).   

How are assets distributed among these 7,700 banks?  The top 12 banks currently hold 69 percent of the total assets of the banking industry.  Community banks, which total about 5,500, have about 12 percent of the banking industry’s assets. 

What are the problems associated with large financial institutions?

1. They are too big to fail.  We cannot allow them to fail because of the negative consequences to our economy and to the world’s banking community.  So this means that we socialize the losses (taxpayers pay the bill) but when they are profitable, as they are now, the banks are allowed to keep their full share of the profits.
2.  They are too big to manage and too complex to regulate.    The recent bank scandals – LIBOR manipulation, money laundering, robo-signing, the “London Whale” – prove the megabanks are out of control.  Though there are a lot of good things in Dodd-Frank, it can only do so much to regulate bad behavior in the banking industry.
3. They are given preferential treatment.  The 20 largest banks pay between 50 to 80 basis points less when borrowing from The Federal Reserve than what community banks must pay.  
4. They are too big to prosecute.  Attorney General Holder stated in recent Senate testimony that “some of these institutions are so large that it becomes difficult for us to prosecute them.”  So in essence, they are too big to jail.  To prove this fact, no one all Wall Street was found guilty on any charges stemming from the 2008 financial meltdown.

So what would the SAFE Banking Act, co-authored by Senator Brown and Senator David Vitter (R-La), do to solve these problems?

1. It would provide sensible limits on the amount of debt that a single financial institution could hold.  No bank could have more debt than 2% of U.S. GDP; and no investment bank could have non-deposit liabilities exceeding 3% of GDP. 
2.  Their funding would be required to come from more stable sources, with about $3 of deposits for every $1 in volatile non-deposit funding.  
3. Banks in excess of this limit would be given three years to comply by drawing up their own proposals to meet this requirement.

Which banks would be affected?  Only six banks would be broken up: JP Morgan Chase, Goldman Sachs, Bank of America, Morgan Stanley, Wells Fargo and Citigroup. 

Now that the economy is improving and there are no immediate crises at hand, we need our legislators to push this bill through Congress on a bi-partisan basis for the president’s signature.  This is something that all of us should want to have enacted.  This is good legislation.  Let’s do it!

Sources: Is Fed Signaling Stance on Bank Break-Ups?, by Kayla Tausche, CNBC.com, March 15, 2013; Senator Sherrod Brown explains why he wants to break up the big banks, by Ezra Klein, The Washington Post, March 9, 2013; Time to break up the big banks, by George F. Will, The Washington Post, February 8, 2013.