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Bill to split up megabanks intro’d

By Claes Bell, CFA · Bankrate.com
Wednesday, April 10, 2013
Posted: 3 pm ET

While some in the Senate work on a bill that would work like an oven, gradually turning up the heat on megabanks to encourage them to downsize, two lawmakers have crafted the legislative equivalent of a massive cleaver.

Dubbed the "Too Big to Fail, Too Big to Exist Act," the two-page bill introduced by Sen. Bernie Sanders, I-Vt., and Rep. Brad Sherman, D-Calif., would give regulators 90 days to identify financial firms large enough to bring down the financial system if they failed. The Treasury would then be tasked with breaking those firms up into more manageable pieces, although the bill doesn't specify along which lines the firms would be split up.

That might be problematic for megabank customers, who likely wouldn't have a good idea what was going to happen to their bank until regulators began taking action.

"Never again should a financial institution be able to demand a federal bailout," Sherman said in a statement.  "They claim, 'If we go down, the economy is going down with us,' but by breaking up these institutions long before they face a crisis, we ensure a healthy financial system where medium-sized institutions can compete in the free market."

The bill put forward by Sherman and Sanders is part of a larger trend in Washington, with many in Congress having seemingly come to the conclusion that the answer to fixing fragility in the banking system is breaking up megabanks.

Just this week, a draft of legislation being put together by Sen. Sherrod Brown, D-Ohio, and Sen. David Vetter, D-La., was leaked to the media that would force megabanks to carry a bigger equity cushion to protect bondholders and depositors in the event of a bank failure. Since carrying more equity is costly for banks, it would likely have the effect of encouraging them to downsize. Obviously, the Sanders-Sherman bill is a little less subtle.

But while momentum for some kind of additional action on "too big to fail" does seem to be growing, the financial services industry has historically had a lot of clout in Washington, D.C., and breaking up the megabanks will be easier said than done.

What do you think? Is slicing up the megabanks the way to go? Will it prevent another financial crisis?

Follow me on Twitter: @ClaesBell.

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3 Comments
SueQ
May 23, 2013 at 11:45 am

Any industry that lobbys/lobbies for exemptions from laws protecting their potential customers from financial harm should have to indemnify each and every financial transaction they commit -- and I use the word commit deliberately for its connotation of wrongdoint -- and should be blocked from suing or taking action against customers who can't pay.

In other words, to auto dealers, up your nose with a rubber hose.