Simon Johnson, former chief economist at the IMF, is ruffling feathers in the economic world with his article arguing that it’s only a matter of time before the largest banks in the US are broken up.
He points to a number of trends: A bipartisan Senate vote last week urging regulators to end subsidies to the largest banks; the continuing concerns about banks that are “too big to fail”; and the debacle in Cyprus that has made everyone more nervous about banks again.
But there won’t be any big legal changes soon. While the Senate flirts with tougher restrictions, the executive branch has its hands more than full trying to implement Dodd-Frank, the 2010 law that overhauled financial regulation. President Obama will be loath to re-open that can of worms, though experts generally have mixed opinions of the law. In addition, almost every Republican voted against it, and they are still attempting to repeal parts of the law, which Democrats see as their big regulatory victory. That doesn’t exactly lend itself to deal-making.
And then there’s the House. There, financial services committee chairman Jeb Hensarling, whose campaign last year ran on tens of thousands of dollars from major banks, is apparently considering unspecified plans to make banks safer:
“A great case can be made that we need greater capital and liquidity standards. Certainly, we have to do a better job ring-fencing, fire-walling—whatever metaphor you want to use—between an insured depository institution and a noninsured investment bank.”
Greater capital standards like the ones in Basel III, which many critics of the big banks say are still too lax? Here’s a letter Hensarling sent last year on the topic:
“While the higher capital requirements contained in Basel III are entirely appropriate for large, internationally active financial institutions that may pose a systemic risk to our economy, the application of these requirements to community and regional banks raises serious concerns.”
So the current standards are appropriate, but should be lowered for smaller banks.
What about ring-fencing—like separating proprietary trading from client trading, as the Volcker rule aims to do?
“If the proposed regulations are implemented in their current form, those regulations will dramatically reduce liquidity across multiple markets, which will in turn make it more expensive for businesses to borrow, invest in research and development and create jobs.”
That’s from a 2011 letter Hensarling and colleagues sent to the Treasury opposing its implementation.
It doesn’t seem like Hensarling will move forward on any new standards. Insiders say to look at the politics of the situation. Republicans are seeking to recover their image after last year’s electoral defeat of their presidential nominee. That’s something the Republican champion of shrinking large banks in the Senate, David Vitter, freely admits.
Meanwhile, Dodd-Frank is doing what it set out to do by making big banks’ riskiest activities more expensive. And regulators are getting more agressive, with eight major investigations going on at JP Morgan alone. We won’t see a mighty axe come down from Washington to break up the largest banks; but perhaps we’ll see death from a thousand cuts.