Breaking Up the Big Banks -- Is the British Example Relevant?

mervyn_king.jpgRep. Paul Kanjorski proposed legislation that would break up the banks, but the specifics are nonexistent (because that's the hard part). The committee is already working on legislation that would allow regulators to chop up banks on a case-by-case basis, as Barney Frank described to me in this article. I've been rather agnostic on the issue of breaking up the banks "in general," because I have a hard time conceiving of a standard method to use to split them up, especially given that the problems of the financial crisis didn't stem from size but rather from connections between the banks. Instead, I've been more focused the tools that are needed in place to make large banks safer and dissolve them effectively, and without bailouts, if they are failing.

Advocates of breaking up the banks have jumped on the news that the British, led by their Fed chair equivalent, Mervyn King (right), are planning on splitting apart their banks. It's an interesting precedent, but it's important to keep in mind that the British banking sector is already much more concentrated than the U.S. If this data is right*, then the three largest banks in the U.K. are all nearly a trillion dollars larger, in terms of assets, than their largest U.S. counterparts. This more recent data puts things in more perspective: The largest, Royal Bank of Scotland, has $3.5 trillion in assets, while the largest U.S. Bank, JPMorgan Chase, has "only" 2.2 trillion -- and there are two other British banks larger than JPMorgan. (Which, incidentally, is one of the banks that has been strongest throughout the financial crisis.) Additionally, there are many fewer banks in the U.K. compared to the U.S., which has a much stronger regional bank system.

What does that mean? I think policymakers in the U.K., seeing that they have essentially three huge banks, the largest of which it owns 70 percent of, are probably wise to decide to break up their banks. Here in the United States, by contrast, we seem to have much more variety and competition, so their situation doesn't seem entirely relevant to ours. We should definitely look into ways to have banks where the U.S. has major ownership stakes sell of divisions to pay back taxpayers sooner -- in the case of Citibank, something that is already happening. The broader U.S. problem is that, when push came to shove in 2008, regulators could either bail out banks or send them into bankruptcy; neither was a good option but bailing them out was better than freezing the lending economy. That's why giving the government the ability to dissolve safely in the case of failure is such a good idea.

That doesn't mean it would be a bad idea to go back to Glass-Steagall, although the mix of commercial and investment banking didn't have much at all to do with last year's crisis, and even the biggest advocate of that position, Paul Volcker, has now said he doesn't want to go back to Glass-Steagall, only to stop banks from running hedge and private equity funds, which seems very wise.

Basically, if regulators have the tools to force banks to divest themselves of certain business areas they shouldn't be in, that's a smart move. But more important than capping bank size is making sure that bad practices are discontinued, and that tools exist to deal with bank failure the right way in the future. All that just underscores the fact that, at the end of the day, having regulators who will enforce rules and take action is just as important as having the right structures in place.

-- Tim Fernholz

* Anyone know where I can find data on British banks comparable to this? I had no luck at the FSA or Bank of England, but I might not know what I'm looking for.

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