The Policy Prescription

The too-big, too-complicated banks must be broken up with strong, new regulatory and antitrust rules in place. No financial institution should be allowed to grow so complicated that they can continue to dominate our politics and and get away with risky and predatory practices. Any bank that’s “too big to fail” is too big for a free market to function.

There’s a growing left-right consensus that in order to avoid future risky, volatile markets, we need to make sure megabanks don’t threaten our economy again. Congress says they are working on a solution to “too big to fail.” But according to bills proposed as the “Break up the banks” bills, they would expand the government’s special treatment for the biggest, riskiest banks and extend the Wall Street bailout indefinitely. Instead, ANWF members have laid out what it actually looks like to break up the banks and address the problem of “too big to fail”. Please join this public call for reform.

How to do it?

Why do banks need to be bigger than 100 billion in assets? They don’t. Banks should operate responsibly with an interest in keeping our economy intact, rather than get so big they can take down the economy and pass bailout packages in their favor. Therefore, Congress should pass a law making it illegal for a bank to grow over a certain size. These laws follow in the great American traditional distrust of concentrated power, and bring Teddy Roosevelt-style trust-busting to the modern “too big to fail” bank. How to do it?

  • Pass laws limiting bank size. Give the Department of Justice the authority to break up banks that are over 100 billion in assets.
  • Pass laws targeting bank size at $100 billion in assets and a target date for compliance. Banks will be responsible for developing a plan to break themselves into components with less than $100 billion in assets by a fixed date, or they pay a fine or must keep higher reserve requirements. If no working plan has been reached after the first 90 day period, fines get larger, and grow again every 90 days until a plan is reached. Banks will have a very powerful incentive to come up with a good plan.
  • Give the DOJ authority to stop mergers that will make banks grow bigger than 100 billion in assets.
  • Require that the DOJ start a planning process now for breaking down the biggest banks (15 or so) that are currently over 100 billion in assets.
  • Pass laws requiring “progressive capitalization” for banks under 100 billion. In other words, the bigger the bank, the more cash it should have on hand. The different levels required should be written into laws so that lobbyists won’t use their power to try to get banks out of requirements.
  • There are already many size-based laws on the books—the FDIC limits what percentage of the countries’ deposits can be held by any bank after a merger, and antitrust law gives the DOJ the power to break up monopolies. We support new, straightforward size-based laws for banks, with enforcement power given to the DOJ, which is less likely to get coopted by pressure from the industry.
  • Pass a modern version of the Glass-Steagall Act to mandate the separation between commercial banking, investment banking and insurance. The public’s deposits should be safely kept rather than be fodder for risky investments. The largest banks are interconnected through lending to one another, and engaged in trading for their own bank accounts. Higher capital requirements for larger banks helps to reduce risky lending. Top regulatory and oversight authority should be given to a Council of regulators, rather than to singular regulatory institutions that failed to recognize and deal with issues leading to the crisis and have shown themselves to be captured by those they should be properly regulating, like the Federal Reserve. The council will be responsible for harmonizing and enforcing effective regulations.

Why break them up?

There are a lot of reasons we should break up the biggest mega-banks, and pass laws so they can’t grow so unwieldy and crash the economy along with our jobs again.

  • Banks that are so big that the government “has to” step in and bail out are inherently dangerous and can blow up the entire world economy, as we have just seen.
  • No set of banks should dominate the market and reduce competition.
  • The financial industry, and especially the Wall Street contingent, are the BIGGEST lobby and wield unparalleled influence in congress and the White House.
  • Smaller banks are easier to manage, and less likely to take out of control risks.
  • If banks believe the government is going to bail them out because they are so big they can’t fail without hurting the economy, they will be more likely to take on greater risks.
  • Bailouts for shareholders and bond holders are an unacceptable use of the public treasury to rescue private risk-takers, functioning as little more than wealth transfers from poor and middle-class taxpayers to wealthy investors and executives.
  • History demonstrates that governments face tremendous pressure to engage in illegitimate bailouts in the midst of financial crises in part because of the lobbying pressure put on government by big banks.

Co-written by Zephyr Teachout, Shawn Bayern, Dean Baker, Mary Bottari, Frank Banks, Tiffiniy Cheng, Donny Shaw, and 20,000 ANWF members. This public proposal for breaking up the banks is open to discussion and additions/edits.

Send Congress a message: We have the solution to “too big to fail” and they need to enact them.

Read more on Too-Big-To-Fail

Read more on Systemic Risk Regulators

Read William Greider’s Proposals

Read more on Usury