Should “Too Big to Fail” Banks Be Broken Up? (S. 3542)

What is S. 3542?

(Updated October 25, 2019)

This bill would create a list of entities deemed “Too Big To Fail” — including U.S. bank holding companies that have been identified as systemically important banks by the Financial Stability Board. The list would be compiled by the Financial Stability Oversight Council and sent to the Dept. of the Treasury. The Secretary of the Treasury would then break up those entities so their failure could no longer have a catastrophic effect on the U.S. or global economy without a taxpayer bailout after submitting the list to Congress and the president.

Any entity on the list would not be able to use or access credit advances from the Federal Reserve, the Federal Reserve’s discount window, or any program or facility made available by the Fed. This includes asset purchases, temporary or bridge loans, government investments in debt or equity, and "capital injections" (i.e. bailouts) from any federal institution.

Insured financial institutions and the entities that own them would be prohibited from using insured deposits to fund:

• Activities related to hedging that are not directly related to commercial banking activities at the insured bank;

• Any use of derivatives for speculative purposes;

• Activities related to the dealing of derivatives;

• Any other form of speculative activity specified by regulators.

The above limitations also apply to entities on the list in order to prevent insured deposits from being put at risk, or creates a risk of loss to the Federal Deposit Insurance Corporation’s (FDIC) Deposit Insurance Fund.

Argument in favor

Taxpayers should never again be left footing the bill if the largest banks fail and threaten to bring the entire economy down with them. Breaking up those banks makes them more manageable and makes the financial system more stable.

Argument opposed

There are economic advantages to having large banks, and small banks have fewer resources at their disposal — which can make it easier for them to fail. Splitting up big banks itself would cause economic chaos and is government overreach.

Impact

Taxpayers, financial institutions found to be “Too Big To Fail”, the Financial Stability Oversight Council and the Financial Stability Oversight Board, the Dept. of the Treasury, Congress, the Secretary of the Treasury, and the president.

Cost of S. 3542

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Sen. Bernie Sanders (I-VT) introduced this bill to break up the biggest financial institutions that are “too big to fail” because of the threat they pose to the economy:

“No financial institution should be so large that its failure would cause catastrophic risk to millions of Americans or to our nation’s economic well being. We must end, once and for all, the scheme that is nothing more than a free insurance policy for Wall Street: the policy of ‘too big to fail.’”

Defenders of big banks point out that the process of breaking them up would be “incredibly disruptive in the short run and anti-competitive in the long run.” There are also questions about what would be left over after the break up, as the new, smaller entities may still be large enough to be considered systemically important financial institutions.

The Federal Reserve Bank of St. Louis analyzed the pros and cons of breaking up big banks, and while it did not offer a conclusive recommendation either way — there were some intriguing insights. It notes that treating banks as if they are “Too Big To Fail” encourages them to take on more risk because of their funding advantage, although there are still safeguards against excessive risk-taking. The analysis also found that there are economies of scale for larger banks that assist in mergers and acquisitions, and could allow them to receive lower risk premiums that allow them to offer services more affordably to consumers.

This isn’t the first attempt Sen. Sanders has made to try and break up the biggest banks in the U.S. He introduced similar versions of this bill in 2009, and again in 2013 — though neither version progressed out of committee in the Senate.

Of Note: There are eight U.S. banks that are classified as global systemically important banks by the Financial Stability Oversight Council, including:

• Bank of America;

• Bank of New York Mellon;

• Citigroup;

• Goldman Sachs;

• JP Morgan Chase;

• Morgan Stanley;

• State Street;

• Wells Fargo.

As of October 2018, there were an additional 22 banks classified as domestic systemically important banks.

Media:

• Sen. Bernie Sanders (I-VT) Press Release
  
• ABC
  
• Common Dreams (In Favor)
  
• Federal Reserve Bank of St. Louis (Context)