The Problems With Limiting Large Banks
RICHARD E. FARLEY, NY Times Dealbook — “Too big to fail is simply too big,” Senator Sherrod Brown of Ohio is fond of repeating on the subject of banking regulation.
On May 9, Senator Brown, the chairman of the Senate Subcommittee on Financial Institutions and Consumer Protection, introduced the SAFE Banking Act – short for the Safe, Accountable, Fair and Efficient Banking Act of 2012. The proposed rule would limit the size of banks and, the senator assures us, prevent another financial crisis and recapture the unfair subsidies given to large banks. It would end corporate welfare for Wall Street megabanks, Senator Brown proclaims.
As if on cue, the very next day, JPMorgan Chase, the best of the big American banks, announced a $2.3 billion trading loss related to a poorly conceived or executed risk management strategy. Immediately, the “shrink the banks” chorus broke into singing the praises of the SAFE Banking Act as the law to save us from JPMorgan’s bad bet and other bank menaces.
If the SAFE Banking Act becomes law, it would, at best, result in more banks “going on welfare” during the inevitable next banking crisis. At worst, we may see what a bank crisis looks like without the power of the full faith and credit of the United States at the regulators’ disposal.
The SAFE Banking Act would impose three limits on the size of banks: no bank could have deposits representing greater than 10 percent of all insured bank deposits; no bank could have nondeposit liabilities in excess of 10 percent of all United States financial sector liabilities; and no bank could have nondeposit liabilities in excess of 2 percent of gross domestic product (3 percent, in the case of nonbank financial institutions).
These limits seek to reduce federal government exposure to banks that are “too big to fail” by making big banks small enough to safely fail….