IT IS becoming common in this campaign season to say the biggest banks still don’t operate with a sufficient margin of safety — that they are still “too big to fail.” Hillary Clinton’s rival for the Democratic presidential nomination, Sen. Bernie Sanders (I-Vt.) has introduced a bill to break up the largest banks. Sen. Elizabeth Warren (D-Mass.), with the support of Sen. John McCain (R-Ariz.), is urging reinstatement of the old Glass-Steagall Act’s separation between commercial and investment banking.
Actually, though hardly risk-immune, the U.S. financial system has made significant progress toward being less bailout-prone since President Obama signed the Dodd-Frank law five years ago. The best way to protect against the systemic financial risk that gigantic global banks present is “capital, capital, capital,” as then-Treasury Secretary Timothy F. Geithner put it in 2009. The more resources banks have available to absorb losses, the less they will have to rely on taxpayers to rescue them. And, partly due to the regulatory pressure of Dodd-Frank, big banks are considerably better capitalized than they were half a decade ago. The 31 largest banks, those with $50 billion or more in assets, now have enough high-quality capital to withstand a repetition of the “Great Recession,” according to the Federal Reserve’s latest Dodd-Frank-mandated “stress test,” the results of which were made public in March.
Additional evidence of this growing stability came on Monday, in a backhanded way. The Federal Reserve called on the eight biggest U.S. banks, those designated as “global systemically important,” to increase their high-quality capital buffers over and above the 7 percent of assets they already are required to hold. Yet for seven of the eight firms, this order was redundant; they already meet the Fed’s target. And the exception, JPMorgan Chase, is within $12.5 billion of the target.
The Fed’s latest move maintains the pressure on banks to streamline and shed higher-risk lines of business. Banking is becoming less exciting, less profitable (and, accordingly, less remunerative for banks’ chief executives) and less vulnerable to the kind of catastrophic meltdown we saw in 2008. All of this renders calls to break up the banks less compelling. Mr. Sanders notes that six financial institutions have combined assets of nearly $10 trillion, or about $1.7 trillion each. If you split each of the six into four smaller banks, you’d have 24 banks with $417 billion in assets apiece, which is still huge — and quite possibly too big to fail. Meanwhile, you would have sacrificed the benefits of large, U.S.-based global banking institutions, which include economies of scale and greater “soft power” for U.S. foreign policy.
Better to stay the course currently being charted by the Fed; focusing on bank capital accomplishes many of Mr. Sanders’s professed goals with less upheaval, economic or political.