“[T]he reforms undertaken since the financial crisis have gone a long way toward addressing the TBTF issue. Proposals to break up major financial institutions entail greater costs than the benefits they would provide and are potentially outright counterproductive.”
Rather than break up the big banks, the Bipartisan Policy Center finds that it would be better to allow the Dodd-Frank Act and other global reforms enacted in the wake of the financial crisis to work as intended.
The paper points out several ways recent regulations have addressed the TBTF issue:
- The new legal authority created by Dodd-Frank to resolve a large, complex institution has lessened market expectations of future government rescues, reducing the cost-of-funding advantage
- The enhanced prudential requirements placed on large banks, like higher capital requirements and annual stress tests, further reduces the funding advantage
- Dodd-Frank permits regulators to restrict activities of financial institutions they deem to pose a “grave threat” to the U.S. financial system
- Dodd-Frank caps the size of large banks at 10% of total U.S. consolidated financial liabilities
The paper also points out that breaking up the big banks would reduce the value they provide the economy, businesses and consumers. Large global financial institutions benefit consumers and business by facilitating international trade, spreading socially beneficial innovations and promoting economic growth.
Furthermore, the paper notes that a breakup presents difficulties, such as how to divide the company’s assets, debts and customers among its successor institutions, and how the breakup would disrupt existing customer relationships.
Finally, the Bipartisan Policy Center finds that there is little reason to believe that breaking up the largest institutions would reduce the risk in the financial system over the long-term. If a large, $2 trillion bank were broken up, it is likely the breakup would result in several $400 billion to $500 billion banks, not multiple small, easy-to-resolve banks. In fact, creating more banks just under the threshold for a breakup could be riskier for the economy, not safer.
Read the paper.