Our financial system has become dominated by institutions that are “too big to fail.” Moreover, as FDIC Chairman Bill Isaac has said, they are “too big to manage, and too big to regulate.” MIT professor Simon Johnson and James Kwak, a researcher at Yale Law School, estimate in the past 15 years the six largest U.S. banks have grown in total assets from 17 to 63 percent of our overall GDP.
We must reduce this concentration of financial power if we are to end Too Big to Fail and the risk it poses to our economy. Trusting the same regulators who abdicated their responsibility in the lead-up to the financial crisis will leave us vulnerable to future financial crises. Despite the claims of the megabanks, there are no economies of scale that justify such massive banks, nor would U.S. multinational corporate needs go unmet by smaller (though still very large) U.S. global banks.
The prudent solution is to shrink these institutions to a manageable size at which they can actually be effectively regulated. The idea of size caps is supported by Thomas Hoenig, President of the Kansas City Fed; Paul Volcker, former Chairman of the Federal Reserve; Mervyn King, Governor of the Bank of England. Richard Fisher, president of the Dallas Fed; former IMF economist Simon Johnson; Dean Baker of the Center for Economic and Policy Research; financial bloggers Felix Salmon and Mike Konczal; and conservative commenter Arnold Kling of the National Review.
Accordingly, Senators Brown and Kaufman have introduced legislation that would impose sensible size and leverage constraints:
Size Limits on Our Largest Financial Institutions
- Imposes a strict 10% cap on any bank holding company’s or thrift holding company’s share of the total amount of deposits of insured depository institutions in the United States.
- Establishes limits on the liabilities of large banking and nonbanking financial institutions:
- A limit on the non-deposit liabilities (including off-balance-sheet ones) of a bank holding company or thrift holding company of 2% of GDP.
- A limit on the overall liabilities (including off-balance-sheet ones) of any non-bank financial institution – i.e. one that the proposed Financial Stability Oversight Council deems a risk to the financial system – regulated by the Federal Reserve of 3% of GDP.
Institute Statutory Leverage Ratio
Codifies a 6% leverage limit for bank holding companies and selected nonbank financial institutions into law.