Big Banks Can’t Be Broken Up The Way Bernie Says
Within the first 100 days of my administration, I will require the secretary of the Treasury Department to establish a ‘too big to fail’ list of commercial banks, shadow banks and insurance companies whose failure would pose a catastrophic risk to the United States economy without a taxpayer bailout,” Sanders said. “Within one year, my administration will break these institutions up so that they no longer pose a grave threat to the economy as authorized under Section 121 of the Dodd-Frank Act.”
Political candidates, especially Presidential candidates, are full of promises they know they can never keep. Breaking up big banks sounds deliciously seductive to people who were spurned or are still angered by the Great Recession of 2008 and the role banks and financial institutions played in it. Victoria Finkle explains the problems with Bernie Sanders’ specific plan to break up big banks.
Rob Blackwell has noted that Section 121 of Dodd-Frank requires a vote from the Fed that institutions pose a “grave threat to the financial stability of the United States,” and a further vote from two-thirds of the Financial Stability Oversight Council. That means Bernie needs four of the seven Fed governors to go along with this plan, and seven of the 10 voting FSOC members to approve it. This is not going to happen.
Even if the Fed assented, it would also need the concurrence of five of the following heads of these seven agencies: Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Consumer Financial Protection Bureau, Commodity Futures Trading Commission, Securities and Exchange Commission, National Credit Union Administration, and Federal Housing Finance Agency. The two other votes are an independent insurance expert and the Treasury secretary.
What’s more, banks will fight this every step of the way in court. To force a breakup under Section 121, regulators will have to prove the institutions pose a “grave threat to financial stability,” a vague legal term, but one which presumably has a high bar. The legal process would take years and it’s not at all clear the government would win.
Breaking Up Banks Is Hard To Do
Breaking up the largest institutions on such a compressed timeline would cause massive disruption and displacement within the financial industry, even if done in a controlled way. As Sanders himself has noted, the six largest U.S. banks hold more than $10 trillion of assets on the books, handle more than two-thirds of all credit card transactions and control more than 95% of the $240 trillion in derivatives held by commercial banks. Dismantling that kind of wealth and power would represent a radical restructuring of the banking system as we know it, a system that’s evolved, for better or worse, over decades. That could severely curtail access to loans and other forms of credit in the short term – and even spur bank runs. Given the American financial system’s impact across the world, it would likely have global knock-on effects, too, that could be hard to predict. Folks may be supportive of busting up the big banks, up until their ATM card stops working.
Sanders’ plan would also set off intense jockeying from the financial services industry. Presumably, the Treasury Department would be required to come up with criteria for evaluating whether a particular bank poses too much risk to the system, a trick that requires taking into account size, complexity, interconnectedness and a host of other factors. That sounds awfully subjective, music to a lobbyist’s ears. For a case study on what this might look like, consider that the financial sector has reportedly spent billions of dollars first trying to derail the passage of Dodd-Frank and then working to defang its rules. You can only imagine the magnitude of pushback that a mandate to break up the banks would inspire.
The Vermont senator has also said he would reinstate a Depression-era law that’s made a surprising comeback in recent years, the Glass-Steagall Act, which would separate commercial banking from riskier investment activities. The proposal is a nod to Senator Elizabeth Warren, who popularized the idea several years ago in a bill of her own. But even Warren has conceded that the change may not have stopped the financial crisis, because many of the firms that led to the meltdown, including AIG and Lehman Brothers, were not connected to depository institutions anyway. She made this point in an oft-cited 2012 interview with New York Times journalist Andrew Ross Sorkin. Theoretical arguments about whether Glass-Steagall could have stopped some of the damage persist to this day, but they overlook the most significant part of that 2012 interview in my opinion, that Warren “considers Glass-Steagall more of a symbol of what needs to happen to regulations than the specifics related to the act itself.”
A great majority out there could sweep Sanders into office and enact a glorious golden age where banks and financial institutions are made to heel. But in the real world, even if Sanders gets elected he couldn’t enact this plan. Wishing otherwise won’t make it so.
What Bernie is suggesting is an extreme solution done arbitrarily. He’s concluded that the big banks are a “grave threat” and need to be demolished, but a lot of people have to reach that same conclusion for the breakup to occur. That’s not a corrupt system, but the actual way we want the system to work.
His rhetoric about big banks fails to focus on what size might be considered appropriate. I’m not sure that anyone can come up with an answer that is sufficiently rational to survive constitutional scrutiny when it is alleged that certain banks were picked arbitrarily for breakup. A better approach would be to impose meaningful incremental restraints on risky behavior, properly fund the regulators, and understand the financial system more fully. This is what Hillary Clinton has proposed.
Democracy requires compromise and compromise is at the heart of bipartisanship. If we extinguish it, we extinguish our form of government and that’s a very dangerous line of thinking. It’s hard for any one person to get much done in Washington, and the Founders intended it that way.
The problem with revolutions is that often you end up in the same place you started. Another problem is that the ones chanting the loudest for the revolution at some point end up against the wall. The U.S. has the oldest continuous republic in the world. Let’s not be in such a rush to overthrow it. You might not like what comes after.