In "Break Up the Megabanks? We Could Do a Lot Worse" (April 17), Camden Fine, President and CEO of the Independent Community Bankers of America, correctly objects to "financial institutions with explicit government guarantees," taxpayer bailouts of mismanaged firms, and "federal officials, not the free market, picking winners and losers." But he then wrongly concludes that the solution to those problems is to preemptively break up even well-capitalized and well-managed large banking companies. In doing so, Mr. Fine overlooks two important realities.
First, the Dodd-Frank Act went a long way toward ending too-big-to-fail by giving regulators the authority and procedural framework to wind down failing institutions of any size – authority that large financial institutions supported and advocated for. The U.S. is the only nation to create a large-scale resolution regime to date. Large institutions no longer enjoy broad government guarantees or immunity from failure. Dodd-Frank also subjects large institutions to a regime of "enhanced prudential supervision" – capital, liquidity, and other prudential standards far more onerous than imposed on smaller institutions – making failure of large banks much less likely.
Indeed, even before Dodd-Frank became law, the industry undertook major reforms that have dramatically improved safety and soundness: capital and liquidity are double pre-crisis levels; balance sheets are much more solid; risk management and governance structures have been dramatically improved; banks have significantly deleveraged; and compensation structures have changed to closely align the personal incentives of executives with the long-term performance and safety and soundness of the employing institution. More recently, most large banks have passed multiple stress tests imposed by the Federal Reserve.
When asked at his post-Federal Open Market Committee press conference on April 25 whether large banks should be broken up, Fed Chairman Ben Bernanke answered: "A more market-responsive way…is tougher supervisory oversight through higher capital requirements, through restrictions on interconnectiveness, et cetera…[and] if we can safely unwind a failing firm, then we no longer have too-big-too-fail."
Second, breaking up large banks would rob the U.S. economy of the unique and significant value that large, diversified institutions deliver – value that smaller institutions simply cannot provide. For example, large financial institutions differ in the sheer size of credits they can deliver to corporate customers, in the array of products and services they provide, and in their geographic reach. Such capacity is particularly important to large, globally active U.S. corporations and contributes directly to economic growth and job creation.
Large financial institutions – active in many markets and countries across the globe – also help connect global stock, bond, and foreign exchange markets, making those markets more modern, liquid, and efficient. Large, globally active financial institutions also expand the supply of credit, capital and other financial services to emerging market economies, contributing importantly to the expansion of trade flows, opening foreign markets to U.S. goods and services and, therefore, contributing importantly to our country's growth and job creation. The Economist magazine points out in its April 21 issue that regulatory pressures on large banks to shrink has already led to dramatic reduction in cross-border lending, to the detriment of global economic growth.
Because large diversified financial institutions provide significant economic value that clients and customers rely on, the likely effect of arbitrary and preemptive break-ups would be to concede global financial leadership to other jurisdictions. At present, America's largest bank is only the tenth largest in the world, and only three U.S. banks are among the top 20.