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Proposals to Break Up Big Banks Threaten All Banks

While I'm sure some community bankers applauded Sandy Weill's recent call to break up our nation's largest banks, I, for one, did not. On the contrary, I believe talk of breaking up large banks endangers the entire banking industry – large, small and everyone in between. 

While some banks made mistakes (and are largely out of business as a result), I am tired of seeing banks get kicked for errors made outside our industry and blamed for everything ailing the economy. 

Every bank plays an important role in our economy. While smaller banks can't provide the financing and specialized services that Michigan's auto manufacturers and large multinational corporations demand, we do supply the credit needed by the auto dealer, the parts suppliers and other businesses that provide critical support for these large companies. We provide loans to their employees and to the retail stores where they shop. Large, medium and small banks are connected in ways that are mutually beneficial and essential to the overall economy.   

Do any of us honestly believe that breaking up large banks wouldn't create a whole new set of problems for midsize and small banks? Our business has already been dealt a substantial blow by the Dodd-Frank Act, even though many in our industry thought its provisions were only directed at large institutions.  There's already over 8,000 pages of proposed and final regulations implementing Dodd-Frank.  Even the smallest community banks are now required to expend substantial time, cost and labor to make sure they don't run afoul of hundreds and hundreds of new rules.  Let's learn a lesson from this experience: We lose when we are divided by others.

The strength of the banking industry — and the American economy — lies in its diversity. As trusted and reputable providers of financial products and services, banks of all shapes and sizes are inextricably tied to the growth and prosperity of the communities we serve.  This interconnectivity and ability to easily meet the financing needs of everyone from local businesses to multinational corporations is what makes our country the world's premier financial center. 

Bankers need to stand up against all attacks on our industry and our banks—large or small. We should take every threat against any bank seriously. No matter what any policymaker promises, an attempt to break up the large banks would hurt each and every one of us. 

Art Johnson is the chairman and chief executive of United Bank of Michigan in Grand Rapids. He was the 2009-2010 chairman of the American Bankers Association. 


(14) Comments



Comments (14)
The issue is simply that a bank
Posted by kcostello | Saturday, August 04 2012 at 10:32AM ET
At some point, soon I think (and hope), one or more of the mega banks will realize that it's customers and investors are not well-served by an overly complex business model that cannot be clearly explained to Wall St. or Main St. and, more importantly, cannot managed effectively. That bank will re-examine it's core competencies, sell off poor performing non-care assets, and spin off through IPOs well-functioning units that are burdened by being embedded in an excessively complex parent co. Once that ball starts rolling others will follow. Market driven, not govt. driven ...
Posted by mbinit | Thursday, August 02 2012 at 11:55AM ET
All this business of the "70 years" of great banking seems to forget the 60s, the 70s, and the 80s. And it ignores the continuing decline of the financial market share held by the banking industry during all of that time. By 1999 the biggest share of the financial world, by far, was owned by the non-banks, and their share was growing as they cherry-picked all of the best customers and best businesses of banks.
Posted by WayneAbernathy | Wednesday, August 01 2012 at 5:23PM ET
Ms. Rehm, I should have expected your support of TBTF, the repeal of Glass-Stegall and the always present trickle down effect to the smallest banks. Our industry is divided. TBTF banks that pillage the taxpayers and honest hardworking locally owned banks doing what is right for small businesses all over America and as a result propping up what little economic life our country has right now. The TBTF and their scads of lobbyists along with the large financial trades in Washington, including an often times confused ABA, can scream all they want but the can-do community banks have their own voice and thank goodness they do. When commercial and investment banking were separated we had decades of expansion and profitability from the great depression forward, but just seven short years passed between the repeal of GS and the collapse of the TBTF banks as they made riskier and riskier bets with the banking of the US Government (read: Taxpayers)
Posted by grsb | Wednesday, August 01 2012 at 4:35PM ET
Commingling of investment house operations and retail banking destroys shareholder value--witness RBS.
Posted by OLDER&WISER | Wednesday, August 01 2012 at 4:30PM ET
RBS' tragedy is little known to the citizens of the US. Nor does tha collapse of that bank's ability to perform the simplest of functions see open discussion on the pages of this site. RBS was an early example of amalgamation of investent house casino gambling with plain vanilla retail banking. The high returns attendant to investment house gambling and the associated high risks distracted the monies and attentions of senior management to the point that RBS is unable to process customer payroll, or enable the simple use of basic bank operations to visit the grocery store to buy food. RBS proves three points: 1) basic functioning bank operations are critical to modern society and 2) the casino gambling can not only destroy the balance sheet and liquidity of a bank--but also its basic operational capability. RBS is the penultimate in falure of the amalgamation of invetment house and retail banking. 3) Lastly investment house operations are run for the benefit of the descision-makers---banks for the benefit of shareholders.
Posted by OLDER&WISER | Wednesday, August 01 2012 at 4:28PM ET
I believe Mr. Johnson is guided by what he thinks he knows instead of what he and rest of us don't know. The big banks carry to much concentration and therefore risk. Systemic risk is real and the amount of lobbying they do is very dangerous as the play the same old game with Congress. Glass-Stegall worked for 70 years and then all hell broke loose. We were the financial leaders in the world and I think it is time for us to reclaim that status, let the rest of the world come back to earth. I for one do not trust the mega institutions, they will always be TBTF and therefore to big to manage. Pressures on quarterly earnings lead to risk and therefore wall street is not trustworthy. I think Mr. Johnson needs to revisit his motives, I for one community banker only see the downside to not breaking up the big banks and limiting size.
Posted by dmanditch | Wednesday, August 01 2012 at 4:19PM ET
Mr. Johnson, the big abusers that brought on the meltdown of 2008, not to mention those big perps who have been publically outed for self-serving and malfeasance since are anything but "trusted and reputable providers of financial products and services." The reputation of the many good institutions is dragged through the mud thanks to the offenses of the big few. Bust up the "too big to be honest" institutions. Otherwise, sooner or later we'll be paying for yet another bailout.
Posted by j.doe | Wednesday, August 01 2012 at 1:48PM ET
I agree with Mr Johnson that government breaking up large banks creates more problems. Banks need to come together on recognizing the major problems of systemic risk and moral hazard, then design comprehendable principled solutions. Systemic risk exist and largely due to mega banks, which by their nature operate with moral hazard. They know the government or Fed will protect them from their mistakes. There will come a time (que European financial news) when the lender of last resort fail, namely the Fed and its financier US tax payers. Tax payers are forced by their government to take on the financial system's tail risk. Tax payers pay through taxes, lose of purchasing power as its currency declines, economic slowdown or recession, and reduced velocity of money. A mountiain of regulation adds to moral hazard and systemic risk, since regulation inversely burdens banks forcing large to get larger.

Solution: Replace a mountain of regulation with a mountain of capital with stronger investor governance. Exponentially require capital based on size. Significantly reduce leverage as banks get larger. If investors like a lower return for a larger bank so be it, but also if they fail so be it.
Posted by parkerco | Wednesday, August 01 2012 at 1:46PM ET
Mr. Johnson's prior role with ABA gave him insights on the way Washington works (and doesn't work), and I think he's right -- any move to break up the big banks would have unintended, trickle-down effects on smaller banks. Also agree with his broader point that a divided industry is a defeated one. Barb Rehm, editor at large, American Banker
Posted by brehm | Wednesday, August 01 2012 at 12:52PM ET
Sandy Weill has it right. He knows from the inside view how the repeal of Glass-Stegall resulted in Wall Street mega-banks failing inside of just seven years following the laws repeal. Mr. Johnson's point regarding the inability for broken up banks to thrive and succeed is more than a little misplaced, consider that the United States largely led the global financial services sector for decades under Glass-Stegall and the banks, both investment and commercial varieties were enormously successful and profitable! Further, nearly every single deadline under Dodd-Frank has been missed and thus the industry as a whole has a lot to learn about how much of a threat the cumbersome legislation will be. One thing is for certain, breaking up the big banks and enforcing many parts of the Dodd-Frank bill will go a long way toward removing some of the risk the TBTF banks bring to our nation's and the global economy and to the taxers of the United States.

Mr. Johnson, past Chairman for ABA continues to carry Wall-Street's water with the voice of ABA and community bankers across the nation suffer as a result.
Posted by grsb | Wednesday, August 01 2012 at 12:50PM ET
If the big banks acted responsibly, I doubt there would be such a call to break them up. If they were merely "banks" the argument to maintain them as-is would have more credibility. When they stray into derivatives and many other riskly areas they threaten the entire financial system. We really don't need to mingle investment banking and commercial banking. Isn't the argument a little flimsy that we need them to finance the auto industry? When we had a very healthy auto industry without these mega-banks, who funded the industry then?
Posted by John C | Wednesday, August 01 2012 at 12:48PM ET
Should be pointed out that Art Johnson is a recent ABA Chairman. No surprise that he is once again carrying Wall Street Water. Wall Street says "jump" and Art says "how high?"
Posted by commobanker | Wednesday, August 01 2012 at 12:20PM ET
Breaking up large banks makes no sense. Size matters!
Posted by Old School Banker | Wednesday, August 01 2012 at 12:10PM ET
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