It was one hundred years ago that the United States Supreme Court ruled that Standard Oil company was too big and had to be broken up into smaller elements. The decision was based on the idea that Standard Oil controlled too much of the market and that it was not healthy for them to have such a monoply, especially in such a critical industry.
Almost thirty years ago a settlement of a similar legal proceeding led to the breakup of AT&T into what were termed ‘baby bells’. Although in this case there was not a formal court ruling the logic behind the original filing and the related settlement was the same as with Standard Oil.
Today I think it is time we seriously look at the next step in this process, it is time for us to have baby banks and in this case I hope it can be accomplished through legislation.
It has been only a few years since the financial crisis cost us nearly one trillion dollars in bailout fund to help support the banks and other financial institutions that were ‘too big to fail’. At the time I was reluctant to support the bailout but also recognized that we were pretty much trapped as failing to support the banks would have led to an even bigger financial collapse.
As disturbing as it was to support those bailouts it is even more disturbing to me that today the situation is, if anything, worse that it was 3 years ago. The banks that nearly brought down out economy have gotten even bigger and the financial power even more consolidated.
For this reason I have long advocated that we need to place limits on the size of these banks and it seems that others agree with me. Dallas Federal Bank President Richard Fisher recently said this was a neccessary step.
The question of course is how we would accomplish this breakup, and certainly I am not going to suggest that as an armchair legislator I have the skills to spell out all of the neccessary details. But I do have some ideas of how things should work.
First there needs to be a cap on the size of a bank, a limit on how many assets it can hold and how many loans it can make (whether mortgage loans, credit cards, merchant accounts, etc). I’m not going to set specific numbers here, if for no other reason that to avoid a back and forth over those. But I would look to it being either a certain percentage of the overall market or keeping it small enough that the theoretical collapse of this bank would not bring down the economy.
Now once the limit was set it would be up to the bank or financial institution to determine how they choose to operate, though I would think regional banking would be a good idea. One bank might operate in California, Oregon and Washington while another did so in New York, New Jersey and Connecticut.
Another limit might be on the amount of investment a bank or institution could have in a particular segment of the overall economy. We’ve seen over the years that banks heavily invested in one sector (be it oil in the 70?s and 80?s or real estate in the 90?s and 00?s) were unable to survive when that part of the economy went into the inevitable slump. Limiting how much a bank could tie itself to one area would help to limit this fallout
We also would probably have to place limits on the degree of interaction between these baby banks. It wouldn’t be very effective to break them up on day one and then let them get so tied together that they would drag each other down.
Certainly there would be no problem with allowing them to offer basic services to each other (for example the ‘Chase Bank of Oregon’ could allow members of ‘Jones Bank of Texas’ to use ATM’s/etc). But the two banks could not invest in each other, or the investment would need to be very strongly limited and regulated.
The topic of regulation is, of course, one of the keys to the whole process. It does very little good to pass new rules if they are ignored. We will need to have a strict and transparent regulatory system to make sure the banks comply.
Among other things they should be required to provide annual reports showing exactly who they are invested with, who is invested in them and the names of every person they have made contributions to and the reports should be distributed to every person who has an account at the bank/financial institution.
For those who feel that these kinds of restrictions on a business are unfair, I might be willing to consider the idea that banks could opt out of the rules (with the caveat that opting out of the rules also means opting out of FDIC). In the event that such a policy was adopted we would need to have very strict disclosure requirements to make sure those who put money in the bank knew what they were getting in to.
Only if an acceptable disclosure process were developed would I support such an option.
Obviously this is just a basic sketch idea and I am sure there are more expert minds out there who could develop a fuller plan. But it seems to me that if we are going to avoid a major disaster in the future this plan needs to happen. Right now it’s like we’re all standing next to the furnace with the steam pipes groaning and we just pretend not to hear.