Financial Regulation: Bridging Global Differences Session Report 492
competition in the banking sector is distorted; the current TBTF institutions also engage in more risky practices and take on more risk. Another speaker remarked that the TBTF banks and increased banking sector consolidation also leads to concentration of risk. As one speaker asked, “Does society want to put many of its eggs in a small number of baskets?” This side argued that this super concentration will keep growing and probably accelerate, thereby only increasing the risk posed by these institutions over time.
This super “concentration will keep growing and probably accelerate, thereby only increasing the risk posed by these institutions over time.
Those in favor of the resolution also argued that breaking up the banks was an important step in reducing the political influence of large institutions. One speaker argued that many of these banks are not being broken up because of the political influence they exert. Moreover, the political influence of a few large institutions could prevent the implementation of needed reforms to the financial sector, which, in turn, would undermine financial stability and prosperity.
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Those in favor also argued that many of the points made by the opposition assumed that breaking up the banks would lead to multiple small, unstable institutions. However, reducing the size of TBTF banks did not require creating many very small banks, but instead more stable “medium sized” institutions. One speaker pointed to the Deutsche Bank balance sheet of over 2 trillion and growing, observing that the institution could literally be split into two banks and they would still be very large. Another key point made in favor of smaller institutions was the idea of “too big to manage.” The JP Morgan “London Whale” was used as an example of the difficulty a large institution might face in managing and monitoring risk. This side argued that a smaller institution would be less complicated and better able to monitor its risk.
Against Those against the resolution were more optimistic that current reforms have sufficiently addressed too big to fail. When pressed on the question, this side argued that even if there are TBTF banks, the relevant question is whether the “best” response is to break them up; even if current proposals leave much to be desired, we should continue to pursue these reforms (such as the EU RRD and SIFI framework) and not circumvent them entirely by breaking up institutions. Moreover, this side argued that breaking up the banks would be tantamount to admitting defeat; if banks must be broken up, then reform efforts thus far have been fruitless and there is little confidence that future regulatory and oversight changes can address the problem. How would recent changes, such as the SIFI framework, be addressed if SIFIs are broken up? Why bother with international resolution mechanisms if the banks are just going to be broken up?
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