Weill Comments Revive Washington Debate on ‘Too-Big-to-Fail’

Sanford “Sandy” Weill’s call this week for breaking up large banks revived debate in Washington over “too-big-to-fail” lenders, prompting renewed assertions by industry groups that size yields economic benefits.

Downsizing would impede U.S. banks’ ability to serve the country’s largest businesses and would lead companies to use foreign banks instead, said Frank Keating, president and chief executive officer of the American Bankers Association.

“It’s time to push the pause button on flawed proposals that would damage the U.S. economy,” Keating said in a statement today.

Keating and others commented after Weill, the former Citigroup Inc. CEO who helped champion the repeal of the Depression-era law that split deposit-taking from investment banking, said in a July 25 CNBC television interview that he now believes the separation should be reinstated.

“A big-bank bust-up on these simple, if alluring, criteria will do nothing to make banking safer,” Karen Shaw Petrou, a managing partner and co-founder of Federal Financial Analytics Inc., said today in a memo to clients of the Washington-based firm. Clearer rules for regulators and bankers are needed instead, she said.

The Clearing House, a New York-based association of large commercial banks, released a report saying that for the last 20 years, bank assets have grown on the same scale as companies in the Standard & Poor’s 500 Index and U.S. exports.

“Large banks offer several unique contributions to the U.S. economy,” the Clearing House said in the report. “These contributions include unique products and services, economies of scale and spread of innovation.”

‘Too Simplistic’

Former Senator Chris Dodd, the Connecticut Democrat who co-sponsored the 2010 financial-regulation law that bears his name, said Weill’s suggestion was “too simplistic” and breaking up banks wouldn’t solve the challenges regulators face.

Dodd’s view was echoed by the law’s other sponsor, Representative Barney Frank, who said the same end can be accomplished by the law’s restrictions on proprietary trading.

“You can accomplish much of what he says he’s now for with the Volcker rule, and I will welcome his support for a tough Volcker rule,” Frank said in a CNBC interview. “The Volcker rule does say that banks should not be engaged in a lot of trading and other non-lending activities.”

Stricter Limits

Some Washington lawmakers expressed support for new measures to curb the size and activities of large banks.

Senator Sherrod Brown, an Ohio Democrat who sits on the Banking Committee and has sponsored a bill to impose size limits on banks, said Weill’s statement will help more bankers and economists recognize problems in the banking system.

“People who understand what’s happening with banks realize that these banks are too big to fail, too big to manage and too big to regulate,” Brown said in an interview.

Senator Robert Corker, a Tennessee Republican also on the Banking Committee, said Weill’s Wall Street past and leadership in repealing Glass-Steagall make his change of heart noteworthy.

“It’s just not possible to regulate in such a way that risk that’s concentrated in this way is mitigated,” Corker said in an interview. “I think people are looking at a lot of things, stronger capital. But I do think coming from someone like this makes it interesting and probably causes people to focus more on what he’s saying.”

‘Interesting Transformation’

Senator Mark Warner, a Virginia Democrat, referred to Weill’s comments during Treasury Secretary Timothy F. Geithner’s appearance before the Senate Banking Committee on July 26. Weill’s call for change represents an “interesting transformation,” Warner said.

Congress thought “long and hard” about the size of banks when drafting the Dodd-Frank Act and enacted “a set of pretty tough new safeguards to the system,” Geithner said.

Senator Joseph Lieberman, a Connecticut independent, and Senator Dianne Feinstein, a California Democrat, both said in interviews that they made note of Weill’s comments and that the issue warrants further consideration.

“I think it will lead people to take a second look at whether it was right to repeal Glass-Steagall,” Lieberman said.

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