When Democratic presidential candidate Bernie Sanders laid out his agenda for financial reform today, he criticized the influence of banks on the government, called for limits on credit card rates and ATM fees, and, above all, promised to break up the largest banks in the country within a year of taking office:
Within the first 100 days of my administration, I will require the secretary of the Treasury Department to establish a “Too-Big-to Fail” list of commercial banks, shadow banks and insurance companies whose failure would pose a catastrophic risk to the United States economy without a taxpayer bailout. Within one year, my administration will break these institutions up so that they no longer pose a grave threat to the economy as authorized under Section 121 of the Dodd-Frank Act.
It’s not clear how the Vermont senator’s list of Too Big To Fail banks would differ from the list of Systemically Important Financial Institutions that federal regulators created and have regularly updated since the passage of the Dodd-Frank financial reform act in 2010. But whichever institutions make the cut, Sanders would have a hard time using Section 121 to break them up within a year of taking office.
Section 121 of the law allows the Federal Reserve to break up any large financial institution it deems a “a grave threat to the financial stability of the United States.” It’s an incredible tool that gives the Fed nearly unlimited power to force a bank to downsize. But it isn’t intended to be wielded lightly—which is why taking action requires the backing of the Federal Reserve’s board of governors and then a two-thirds vote by the members of the Financial Stability Oversight Council (FSOC), which includes all eight major financial regulators and the Treasury Secretary.
This is where Sanders would likely run into trouble. The Fed’s board of governors is made up of seven people (usually, anyway—there are two vacancies currently) and they are appointed by the president and confirmed by the Senate, to staggered, 14-year terms. Terms for the current five members of the board, all appointed by president Barack Obama, won’t expire until sometime between 2020 and 2026. And while the chair and vice-chair of the board only serve in those positions for four years, the next president won’t have a chance to replace them until early 2018—a year after taking office.
It seems highly unlikely that the existing Federal Reserve board will decide to use their power to break up the banks simply because a newly-elected president Sanders instructs them to do so. Even if he were able to secure their assent, he would need also need to appoint a passel of new regulators to okay their action, with the assent of a Senate that will likely be outright hostile to Sanders’ plans. If he is serious about using the Fed to break up the banks, he will need to first go through a knock-down, drag-out fight to appoint a Fed board willing to back his plan.
Sanders’ promise itself seems too big to succeed. That may be why reforming the Federal Reserve is also a favorite idea of the Vermont senator—but that’s just as tricky a proposition.