Former Regulator: Breaking Up Big Banks Is NOT the Answer

by 26 Mar 2012
(Yahoo Finance) -- The 2008 financial crisis pushed the global economy to the brink of collapse and exposed major flaws in the financial system. Four years later, most observers agree policymakers whiffed on addressing one of the major causes of the crisis: The difficulty of dealing with financial institutions so large they are considered -- by regulators, the Street and the firms themselves -- as 'too big to fail' (TBTF).

"The TBTF institutions that amplified and prolonged the recent financial crisis remain a hindrance to full economic recovery and to the very ideal of American capitalism," Dallas Fed President Richard Fisher wrote last week. "It is imperative that we end TBTF. In my view, downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the only appropriate policy response."

Fisher's comments prefaced the Dallas Fed's annual report entitled Choosing the Road to Prosperity: Why We Must End Too Big to Fail — Now, which notes (among other things) that the five largest institutions control more than half of the U.S. banking industry assets and the top 10 account for 61% of commercial banking assets vs. 26% 20 years ago.

In addition, the report argues that the Dodd-Frank financial reform legislation "may actually perpetuate an already dangerous trend of increasing banking industry concentration."

In the accompanying video, I discuss the 'too big to fail' issue with James R. Barth a senior fellow at the Milken Institute and co-author of a new book Guardians of Finance: Making Regulators Work for Us.

Big Banks? No Problem

While Barth agrees with the Dallas Fed about Dodd-Frank being a flawed response to the 2008 crisis, he comes to a very different conclusion when it comes to the issue of 'too big to fail.'

"The problem is not size per se. Big banks are not really the problem," according to Barth. "The problem is excessively risky activities in which banks engage and banks that operate with too little capital."

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