Finance

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

The call to break up the biggest U.S. banks is getting a lot louder.  

In a speech that reads like a cover letter on a resume sent to the White House c/o Bernie Sanders, new Federal Reserve Bank of Minneapolis President Neel Kashkari has joined the chorus of people suggesting it's time to take the chainsaw to the country's Citigroups, Bank of Americas and JPMorgan Chases. The former Goldman and Pimco hand who oversaw the Treasury's bank bailout program during the financial crisis laid out these suggestions he believes should be given "serious consideration:"    

*Breaking up large banks into smaller, less connected, less important entities.
*Turning large banks into public utilities by forcing them to hold so much capital that they virtually can’t fail (with regulation akin to that of a nuclear power plant).
*Taxing leverage throughout the financial system to reduce systemic risks wherever they lie.

That's a lot to chew on, but what everyone will talk about now -- once again -- is breaking up the big banks, a cornerstone of Sanders's platform. Kashkari, by embarking on a public campaign to study the issue in his very first speech, has effectively claimed the high ground as Main Street's central banker -- who doesn't think the too-big-to-fail problem has been fully remedied yet. If his speech reads more like a politician's than a central banker's, remember he did once run for governor of California. And in the political set, getting tougher on banks has become a competitive sport.  

In the feud between the many small fish and the handful of whales in the banking industry, Kashkari has decided to swim with the guppies. By breaking up the biggest banks to make the system more safe and secure, it could provide an opportunity to relax regulations on smaller lenders, he said on Wednesday in an interview on Bloomberg Go

The Big Get Bigger
Combined assets of JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and Wells Fargo have grown since the financial crisis.
Source: Bloomberg data



It's worth noting that while executives at the biggest banks are undoubtedly working on rebuttals to Kashkari, their shareholders may be willing to hear him out. This plan could actually do to the big banks what Carl Icahn and John Paulson want to do to American International Group, under the belief that the company is being valued less than the sum of its parts.  

Citigroup could be a prime example. Sandy Weill built it into a supermarket for one-stop financial shopping that was once the world's largest bank. But its series of fiefs turned unwieldy and were free to take big risks with impunity. That led to billions of dollars of losses and a government bailout during the financial crisis. The bank began shedding some of its parts, and government regulators have started to rein in the rest. Weill himself changed his tune a few years back and said banks should be split from investment banks.

The more stringent capital ratios required of the largest financial institutions have chipped into the too-big-to-fail notion. The biggest banks once had a perceived advantage because of an implicit emergency backstop from the government. Now, they are being required to build larger capital buffers that could put them at a disadvantage to smaller firms. 

That raises the prospect that market forces could eventually do what Kashkari, Sanders and others want to do. Also, the emergence of competitors in the fintech startup space and the idea that "modular financial services" could reshape the industry's competitive landscape could further weaken the logic behind supermarket banking. 

Kashkari doesn't want to wait on market forces or a crisis that tests the new buffers. Instead, he wants to compile opinions from all interested parties and develop a proposal that can be sent to Congress. As he does, let's hope he was serious about this line in his speech: "We will also invite leaders from policy and regulatory institutions and, yes, the financial industry to offer their views and to test one another’s assumptions."

To begin challenging one another's assumptions, he'll have to start with objectively exploring the banks' role before and during the financial crisis and whether enough safeguards have been installed to prevent another one.

One interesting aspect is the government-arranged marriages between the biggest banks and struggling lenders and brokerages during the crisis.

The biggest banks bear a lot of the responsibility for the financial crisis. But the government turned to them for help as the crisis erupted and in fact made some of them even bigger, with taxpayer assistance. JPMorgan absorbed Bear Stearns and Washington Mutual. Bank of America had plenty of its own problems -- see Countrywide Financial -- but agreed to take over Merrill Lynch. The shotgun marriages failed to stem the crisis and taxpayers were still on the hook, but the bailouts have been paid back with interest. Here's an assumption to test: Would Lehman Brothers-style bankruptcies for all those struggling firms have resulted in a more positive outcome for the overall economy?

The point is the crisis was much larger and more complex than the biggest banks running amok. Much work has been done to make them safer to avoid a repeat of the too-big-to-fail problem. So it's worth at least considering a challenge to the assumption that we'd be better off without them.   

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net