Break Up the Big Banks

Richard Fisher, President of the Federal Reserve Bank of Dallas, has written a new article arguing that "Too Big to Fail" banks are "too dangerous to permit." George Will has a summary.

There are 6,000 American banks, but “half of the entire banking industry’s assets” are concentrated in five institutions whose combined assets amount to almost 60 percent of the gross domestic product. And “the top 10 banks now account for 61 percent of commercial banking assets, substantially more than the 26 percent of only 20 years ago.” The problems posed by “supersized and hypercomplex banks” may, Fisher says, require anti-obesity policies equivalent to “irreversible lap-band or gastric bypass surgery.” The land of TBTFs is “a perverse financial Lake Wobegon” where all crises are “exceptional,” justifying “unique” solutions that are the same — meaning bailouts. This incurs “the wrath of ordinary citizens and smaller entities that resent this favorable treatment, and we plant the seeds of social unrest.” 

As long as the big banks remain TBTF, they have an implicit guarantee from the US government, and this gives them preferential access to capital. This advantage insures that they will keep getting even bigger, and even more dangerous:

Capitalism — which is, as Milton Friedman tirelessly insisted, a profit and loss system — is subverted by TBTF, which socializes losses while leaving profits private. And which enhances the profits of those whose losses it socializes. TBTF is a double moral disaster: It creates moral hazard by encouraging risky behavior, and it delegitimizes capitalism by validating public cynicism about its risk-reward ratios.

I agree with this completely, but I suspect that breaking up these banks would be a vastly complex undertaking. And what rules would be put in place, over the long term, to limit bank size? Would any bank that reaches a certain size be forced to split? Would that simply cause the big banks to create subsidiaries in Switzerland or the Cayman Islands and stash their assets overseas? Perhaps we could simply undertake a one time splitting up of these banks into about five pieces each, and then forbid future mergers.