Momentum is growing to deal with financial institutions deemed too big to fail by breaking them up so they’re not so big in the first place.
“The era of the big bank is over,” said Simon Johnson, a professor at the Massachusetts Institute of Technology and former chief economist at the International Monetary Fund.
A proposal in Congress carries important ramifications for the economy’s future and the ability of U.S. financial institutions to compete abroad, experts said. Critics point out that only a handful of the world’s largest financial companies are U.S.-based, and they say megacorporations need megabanks to meet their needs.
The call to limit the size of financial firms has come from former Federal Reserve Chairmen Alan Greenspan and Paul Volcker, as well as some economists. Europeans are considering a similar move, and the Fed’s British counterpart, the Bank of England, said it would force three bailed-out giants to downsize.
A House committee last week voted to give regulators the power to break up large financial institutions that pose a “grave threat to the financial stability or economy of the United States.”
The plan goes further than the so-called resolution authority the Obama administration has requested. Under that plan, the government would be able to take apart large companies if they were on the brink of bankruptcy and were so interconnected that their failure could cause economic chaos. That was the case with American International Group last year.
But many lawmakers say the government needs the ability to break up companies engaged in risky behavior before they get to the point of collapse.
“The American mind is asking … ‘Are we going to allow institutions to put their lives, their children’s lives, the entire country at risk? Or can we take preventive action to prevent this risk?'” said Rep. Paul Kanjorski, D-Pa., who wrote the breakup provision.
The concept is simple, supporters said: The bigger you are, the harder you fall.
“When small guys screw up, we shut them down,” Johnson said. “We’re good at managing failure. What we can’t do is deal with the failure of big guys.”
Kanjorski’s proposal would require regulators to give special attention to the 50 largest financial institutions, those with more than $17 billion in assets. Under that proposal, a forced divestiture of assets worth more than $10 billion could not take place without the Treasury secretary’s approval, and a divestiture of assets of more than $100 billion would require consultation with the president.
But it oversimplifies the problem to say that simply being big is bad or risky, said Rob Nichols, president of the Financial Services Forum, a trade group of the chief executives of the 18 largest U.S. financial institutions.
The group supports tighter regulation, such as having big companies hold more capital to cushion against losses. And it largely favors the administration plan to let the government seize and dismantle firms near failure to avoid potential chaos.
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But unless the entire world cracked down, a move would put the U.S. at a disadvantage, Nichols said. If the United Kingdom and the European Union followed suit, Asian banks would step into the void, he said.
“Boeing, Caterpillar, Coca-Cola … they can’t have their financial needs met at the Bank of Burbank. They need these large global financial institutions,” he said.
Most Republicans oppose giving the government breakup power.
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