Bair Sees Investors Joining Regulators in Push to Shrink Banks

  • Shareholders are already pressuring banks, ex-FDIC leader says
  • The market may drive the trend, as regulation squeezes returns

Sheila Bair Makes the Case for Banks' Living Wills

Former regulator Sheila Bair said investors may have the final word on determining whether large banks should shrink, regardless of what voters decide in a U.S. presidential election in which the size of financial firms has been a key issue.

“You’re already seeing shareholders putting some pressure on these large banks to come up and start analyzing whether they would be worth more in smaller pieces,” Bair, the ex-chairman of the Federal Deposit Insurance Corp., said in a televised interview Tuesday when asked by Bloomberg’s David Westin whether regulators had solved U.S. banks’ too-big-to-fail problem. “This process needs to play out. I think the market would drive this and accelerate it if they increased the capital requirements further.”

JPMorgan Chase & Co. and Bank of America Corp. are among five major U.S. banks that failed to persuade regulators they could go bankrupt without disrupting the broader financial system, the FDIC and Federal Reserve said this month. The lenders have until Oct. 1 to rewrite their resolution plans, or living wills, and another failure would give regulators power to subject them to more capital or liquidity constraints.

U.S. Senator Bernie Sanders, who is seeking the Democratic nomination for president, has made breaking up the banks a centerpiece of his campaign. That view has resonated with voters who are frustrated by the 2008 bailouts that propped up some of the lenders that helped fuel the financial crisis with risky mortgage bets. Many banks have already been scaling back some operations in recent years as tighter oversight squeezes returns.

Citigroup, JPMorgan

Citigroup Inc. could lift shareholder value by 57 percent by breaking itself into smaller pieces, analysts at Keefe, Bruyette & Woods said in March, citing capital rules that make it difficult to earn acceptable returns. Last year, Goldman Sachs Group Inc. analysts said JPMorgan’s parts were probably worth more than the whole after regulators proposed tougher rules penalizing firms for size and complexity.

“It’s harder and harder for them to make the return on equity as the capital requirements go up,” Bair said of the major banks Tuesday. Increased scrutiny “discloses some of the inefficiencies of these very large conglomerates.”

Bair was appointed the 19th chairman of the FDIC in 2006 by President George W. Bush. She served a five-year term that ended in 2011. In August, she became the president of Washington College in Chestertown, Maryland.

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