What Breaking Up the Banks Wouldn’t Fix

from The Atlantic

Nearly a decade ago, as the entire financial system was collapsing, the bank where I worked, Citibank, was deemed too big to fail. Many other banks were also in the same situation, and also bailed out and allowed to live. And live on they do. Today Citibank, and the other banks, are just as big.

This is causing some policy makers to worry. Neel Kashkari, who helped structure the bailout, is now president of the Federal Reserve Bank of Minneapolis. On Tuesday he gave a speech, stating that those big banks pose an “ongoing risk to our economy.”

It was an impressive speech and surprising given his past as both a Goldman Sachs banker and as a “free-market” Republican. It also angered many bankers and politicians, because he voiced a secret of Wall Street: Despite Dodd-Frank, despite claims to the contrary by some politicians, “the largest banks are still too big to fail (TBTF).”

One of his proposed solutions—breaking up the banks—puts him in the same company as Bernie Sanders and a handful of other politicians. Doing so would go some of the way toward improving bank governance: If the government turns Citibank into ten smaller Citibanks, they will probably be better managed, since too big to fail is also too big to manage. Additionally, some might start doing things differently from the rest, even innovating.

More here.

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3 Comments

  1. Despite the fact that this article is a few years old, I thought it was still relevant for today due to our administration’s continued banking deregulation. I clicked on the article because I wholeheartedly disagreed with the headline. This country survived for a long time without relying on just a handful of mega-banks that dominate nearly all of the financial sector. It took less than a decade after commercial and investment banks were allowed to merge for the economy to crater, and due to the fact that they were kept separate in response to the worst economic collapse in the country’s history, I don’t think it is out of line to suggest that we return to that system. With such limited regulation, the banks are able to operate unchecked, but with no fear of repercussions knowing that they have been deemed too big to fail. Smaller banks with less employees would be less essential to the country’s overall economic health, would not be able to operate under the safety blanket of a government bailout, so would therefore have to change their strategy to limit risk, which is the way most other businesses have to operate. The assertation in this article is that the incentive structure of banking institutions is what needs to be changed, not the size of the institutions themselves. But those incentive structures only exist because of how little risk the banks themselves are ultimately taking on. Smaller companies cannot afford to behave as recklessly as the big four American banks do today, because of how dominant they are throughout the country. The wither is correct in that investment bankers should face repercussions for their failures, which they do not under the current structure. However, a lot of that would happen organically if retail and investment banks were to be divided into separate entities. Separate retail banks become immensely safer to the average depositor without the attachment of the gambling investment arm, and the only people at risk when those gambles lose are the people who could afford to put their money on the line in the first place. Average people shouldn’t be subsidizing the constant wheeling and dealing of the banking world, and the government shouldn’t either. With separate retail and investment banks, people would have a safer place to store their savings, and investment bankers can continue to do what they do without the risk of damaging the account of people who don’t want their service.

  2. I strongly believe that banks do not need to be broken up. The statement that I agree with the author is that even if you broke up the big banks the real problem is that banks are fundamentally flawed. Big banks take too much risk with the expectation of bailouts every time they are in trouble. I feel that individual people are just as responsible for who they decide they bring their business to just as the big banks should be responsible on how they conduct their business. I do believe that there is a certain amount of government regulation that should be put in place but ultimately i believe that the market should determine the success of any business, not just banks. I also think that banks should care about customers money even though it is not their money. Even though it is hard to hope that all parties could be morally responsible so that all parties involved can benefit from any transaction.

  3. In the last few years, due to the financial crisis, the industry has seen a lot of consolidation by mergers and acquisitions by Big Banks. Capital markets experienced a revolution primarily due to technology change and a major change in market structure. E-trading dramatically increased trading volumes since it cut a lot of the trading fees and broker’s commissions which made it very easy for anyone to trade and relied less on actual brokers. Another reason that contributed to the industry consolidation is market volatility, which made it harder for mid-size and even big securities firms to last in a period where the market is not too compelling to investors and therefore their exit strategy is too consolidated with another big firm in order to survive. Although breaking up the bank could lead to better management, however, during a crisis those small banks won’t survive as seen from before.

    Federal banking regulators are expected to enforce changes for the purpose of improving the calculation of risk-weighted assets and the comparability of capital ratios are expected to take place in the future, along with stress capital buffer requirements that would ease the number of capital banks has to hold, those proposed changes envisioned as a way to combine its stress testing standards with separate capital requirements, streamlining the process and allowing the regulator to customize capital standards for each firm. That should help banks to hold to only hold the adequate amount in their reserves, giving banks a wiggle room to increase their spending while keeping a reserve to protect the consumers during a crisis.

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