Ever since the great financial meltdown of 2007-2008, the breaking up of the monster banks has been a hot topic in American politics. Unfortunately, there seem to be almost no workable proposals for such a breakup out there.
Practical bank breakup proposals are lacking because most of the people proposing such a measure seem to understand the banking system or how it works. Most of the breakup suggestions, I have seen involve cracking up banks over a certain size, or preventing financial institutions from having a value that exceeds a specific percentage of the USA’s gross domestic product (GDP).
The thinking behind these suggestions is to prevent the formation or continuation of financial institutions that would be “too big to fail.” Many observers blamed gigantic financial institutions for the size and scope of the 2007 and 2008 financial crisis.
Most bank breakup proposals would fail to make the economy safer, or more stable because the people who make them fail to understand how institutions got to be too to fail in the first place. Understanding how banks got that way can prevent the formation of more institutions that are too large.
Some Suggestions for preventing the formation of Too Big to Fail Financial Institutions
“If they’re too big to fail, they’re too big,” Allen Greenspan speaking before the Council on Foreign Relations in October 2009. “In 1911 we broke up Standard Oil — so what happened? The individual parts became more valuable than the whole. Maybe that’s what we need to do.”
The giant banks got that way because they owned or controlled a large portion of the banking infrastructure. Therefore the best way to prevent the emergence of Too Big to Fail Banks is by forcing such behemoths to divest of large portions of their infrastructure.
A few proposals for achieving that goal include:
- Make the Monster Banks divest themselves of their automatic teller machines (ATMs). Since these handy contrivances are average people’s primary gateway to the banking system they are a source of enormous power. Creating separate organizations to operate ATMs would create new financial networks that smaller banks and credit unions can plug into for growth.
- Force the Monster Banks to spin their online banking operations off as separate entities. Since the only way many people bank is online or through an app these days, online banking gives giant institutions an unfair edge. Separating brick and mortar and online banks will create new independent institutions that would be more competitive and lower rates for consumers.
- One way to do this would be to create a new class of internet only or digital only banks separate from traditional financial institutions. This might create new investment opportunities and offer more choices to consumers.
- Force banks to separate their commercial, investment, and consumer banking operations. In other words, restore the prohibitions created by the Glass-Steagall Banking Act of 1933. This would keep banks from engaging in risky investments and prevent large institutions from monopolizing the financial markets. It might improve customer service by creating more customer-centric and market-focused financial institutions.
- Make it illegal for banks to issue credit cards. Force companies like Capital One (NYSE: COF) and Citigroup (NYSE: C) to sell their credit card operations. This would increase competition, improve customer service, and discourage some risky business practices.
- Make it illegal for banks; or banks over a size, to issue mortgages and auto loans. This would discourage some risky lending, and encourage the development of new more customer-focused financial institutions to fill the void created.
- Create new federal agencies to regulate the mortgage and consumer lending industries.
- Make it illegal for insurance companies to engage in banking, and banks to sell insurance. Two of the financial institutions that created the most problems in 2007; were the insurance giant AIG and Citi which owned the Traveler’s insurance company.
- Make it illegal for banks to offer brokerage services such as investment advice and retirement planning. This has had led to some of the worst abuses at companies like Wells Fargo (NYSE: WFC).
- Make it illegal for tech companies like Alphabet (NASDAQ: GOOG) which owns Google, Amazon (NASDAQ: AMZN), and Apple (NASDAQ: AAPL) to offer financial services. Force them to spin Apple Pay, Amazon Pay and Google Pay off into separate companies. This will prevent these companies from growing into mammoth, disruptive and potentially dangerous financial institutions. An added benefit for investors would be the appearance of lucrative new financial stocks like PayPal (NASDAQ: PYPL).
- Make it illegal for retailers like Walmart (NYSE: WMT) to offer financial services. Walmart Pay, in particular, has the potential to develop into a financial institution rivaling PayPal in size and scope.
- Prevent companies like PayPal and Square from Square (NYSE: SQ) from lending. PayPal’s lending volume hit $3 million a day in November 2017, Fortune reported. This is potentially dangerous because PayPal’s resources are limited compared to those of banks.
- PayPal had just $13.407 billion in cash and short-term investments and $2.883 billion in cash and equivalents on December 31, 2017. JP Morgan Chase & Co (NYSE: JPM) had $430.12 billion in the bank on the same day. That indicates PayPal can easily find itself out of cash and unable to service loans in a future economic crisis. PayPal’s lending is potentially very dangerous because it is loaning a lot of money to risky borrowers like small businesses. A likely future for PayPal is to end up selling itself to something like JPMorgan Chase to prevent a meltdown.
- Limit the variety of financial services that companies like PayPal, Square, Amazon, and Alphabet (NASDAQ: GOOGL) can offer. This is critical because such companies are moving into potentially risky new areas such as cryptocurrency.
- Create new government agencies to oversee and regulate new financial technologies such as mobile pay, blockchain-based investments, and cryptocurrency.
- This step is critical because existing agencies like the SEC and FDIC have a strong incentive to suppress new financial technologies that can create competitors to the institutions they regulate. One reason for this is that many of their employers seek high-paying jobs at banks or on Wall Street after leaving “public service.”
- Another reason to create such agencies is to ensure government supervision over and expertise in the new payments technologies. One reason why the catastrophe of 2007 and 2008 occurred was that regulators simply did not understand the changes to the financial markets or new technologies.
- Make it illegal for veterans of agencies like SEC, FDIC, and Office of Thrift Supervision to work for banks or other financial institutions.
- Offer government-owned or sponsored alternatives to banks and privately owned financial services and products. Examples of these can include postal savings accounts and India’s United Payments Interface (UPI) which helped build Google’s Tez solution in India. The UPI is sponsored and overseen by the Reserve Bank of India – that country’s central bank.
- Create an American UPI for the dispersal of Social Security payments, veteran’s pensions, federal employees’ salaries, payments to federal contractors, tax refunds, tax credits, Basic Income, and payment of Medicare and Medicaid claims to healthcare providers. The American UPI would enable Uncle Sam or the Federal Reserve to bypass the banking system and disperse cash and benefits directly to citizens.
- An American UPI would give the federal government more control over the financial system and provide financial networks not operated by banks and vulnerable to financial crises.
- Develop and distribute a U.S. national cryptocurrency. This would lower financial industry costs, encourage innovation in Fintech, and encourage wider participation in the financial system by citizens. It would also give the government or the Federal Reserve more control over the financial system.
- Another reason to create a national cryptocurrency is that it might be less vulnerable to problems in the financial system than the current status quo. For example, it can offer consumers a higher level of security, transparency, privacy, and reliability than the present day banking system.
- Make it illegal for financial institutions to engage in lobbying or least paid lobbying.
- Ban or limit campaign contributions by financial institutions.
As you can see these reforms go far beyond just breaking up the too big to fail monster banks. A fundamental change in our financial system and government will be needed to prevent more catastrophes like 2007. Unless we fundamentally change the way the financial system operates we face cataclysmic financial crises in the future that will dwarf those of 2007.
Simply breaking up too big to big fail institutions which reforming the system will be a pointless endeavor. The only real way to prevent future meltdowns is to fundamentally reform and modernize the infrastructure of finance. The government must take the lead in such modernization.