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Despite a growing number of calls from policymakers and regulators to break up the biggest banks, Fed Chairman Ben Bernanke instead endorsed a batch of rules under Dodd-Frank that discouraged banks from becoming too large and overly complex.
April 25 -
A growing cadre of policymakers and regulators are arguing to break up the big banks. Here's why it's a bad idea.
April 25 -
Too-big-to-fail stifles economic growth. Oligopolies and asset concentration strangle competition and suppress innovation, job creation and free markets in financial services, as they once did in oil, steel and telecommunications.
April 17
In "
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
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
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.
To be a global financial leader, the United States needs institutions of all sizes, business models, and areas of expertise. And being a global financial leader is an enormous strategic advantage for the U.S. economy and American businesses, workers, savers, and investors – an advantage we should work hard to preserve.
Rob Nichols is the president and CEO of the Financial Services Forum.
