Do Big Banks Need to Fear a Breakup?

Economist Simon Johnson is out with new Economix column positing that big banks should get ready for a break up.

 "There has been an outbreak of clear thinking among officials and politicians who increasingly agree that too-big-to-fail is not a good arrangement for the financial sector,” Johnson writes. He goes on to cite the recent opposition voiced by Sens. Sherrod Brown, David Vitter and Elizabeth Warren as well as U.S. Attorney General Eric Holder’s surprising admission regarding "too big jail” among the evidence "the executives who live well on subsidies at big banks should be very afraid."

Political and public outcry against "too big fail" has certainly grown in the last few months.  As American Banker pointed out, there was a groundswell of populist anger against the megabanks back in February with comedian Stephen Colbert and, later, news and gossip sheet Gawker among the non-politicians arguing little had been done to quell the systemic threat a big bank failure poses to the global economy.

 "There's momentum, for sure," public relations consultant Harvey Radin notes in a recent BankThink post that argues big banks should voluntarily break themselves up to save their public image. 

Zions Bank CEO Harris Simmons echoed the concern when he stated the country's biggest banks are "one major misstep" away from being broken up at American Banker's annual Best Practices in Retail Banking Symposium.

"Right now it's a parlor game. … Whether this gets enough momentum, who knows, but I think we have about one more major problem in large banks, and it's probably a done deal," Simmons told the audience.  

But these stern warnings may premature (or in Johnson's case wishful thinking, given that he's expressed ample support for breaking the megabanks up before). There is a big divide between lawmakers giving regulators a tongue-lashing on "too big to jail" and getting a bill on size limits for financial firms through both the House and the Senate.

"If we cannot eliminate Fannie and Freddie, two of the most direct government subsidy vehicles, how can we tackle the big banks?" one commenter wrote on an earlier Johnson column.

And, perhaps as prevailing criticism of Dodd-Frank reform illustrates, coming up with a viable solution to the problem is far from simple.

"Potential influence on economy and borrowing costs needs [to be] part of #TBTF breakup talk," Mayra Rodríguez Valladares, managing principal at MRV Associates and BankThink columnist, tweeted in response to Johnson's column.

Has the political tide turned against the big banks enough for Congress to impose limits on their size? Do large financial institutions need to fear a break up? Why or Why not?  Let us know in the comments below.

Jeanine Skowronski is the deputy editor of BankThink. You can contact her at Jeanine.skowronski@sourcemedia.com or follow her at Twitter @JeanineSko.