ThoughFederal Reserve Bank of Minneapolis President Neel Kashkari has made ending toobig to fail a top goal of his tenure, the first symposium on the subject showedthere remains little agreement on whether Dodd-Frank and other regulations haveachieved that goal.
And withKashkari and others floating the idea of breaking up the banking world's biggestcompanies, it was clear that for many financial industry veterans and observers,that remains a radical option to consider.
SimonJohnson, a professor with the MIT Sloan School of Management and a senior fellowat the Peterson Institute for International Economics — and one of the most outspokenand relentless critics of too-big-to-fail institutions since the financial crisis— laid out the case for breaking up megabanks during an afternoon panel at the MinneapolisFed's first public symposium on ending too big to fail.
Johnsonargued that the era of institutions representing sizable portions of U.S. GDP onlybegan 20 or so years ago and said policymakers need to ask themselves "whatdid we gain — what was the improvement in services, or products, or lower interestrate spreads or better management?" Johnson said that, ultimately, there wasvery little appreciable social value associated with the growth of giant bank holdingcompanies.
He alsosaid that whatever the progress made on addressing systemic risk, there is littlecertitude in markets that a major firm could be wound down in an orderly fashion.He pointed out that company-produced living wills were complicated — he said atleast one was 100,000 pages long — and probably would not hold up in stressed markets.
"Canthey fail? It's a very straightforward question," Johnson said.
Amongthose questioning whether policymakers need to go so far as breaking up banks isGene Ludwig, the founder and CEO of Promontory Financial Group and former Comptrollerof the Currency under the Clinton administration. Ludwig said breakingup the biggest banks would be a major step taken essentially on a "hunch,"and that regulators need better data about what exactly the process would entail.
For hispart, Johnson said he is advocating a policy under which regulators would not beforced to operate on hunches. "I understand the no policy by hunches — goodidea — but [regulators] were rather on the spot having to make a lot of policy duringthe crisis, right?" Johnson said.
The twosummed up the arguments of policymakers who fall on both sides of the break-up questions.One area of debate is just how crucial having mega-banks is to the smooth functioningof credit and other markets. Ludwig argued that the largest companies and governmentsrely on the biggest global banks for financing, payments and a rangeof other services.
"It'snot a matter of affection or law — it's a matter of marketplace realities,"Ludwig said, adding that driving this business to foreign banks or shadow lenderswould do little to protect U.S. markets from systemic risk. Ludwig urged that policymakersintent on breaking up the largest institutions investigate whether the companies'size and reach can be appropriately replaced by a group of smaller institutions.
He addedthat there had been little research into what a post-breakup financial world wouldlook like, and how exactly policymakers could force an orderly divestment of assetsand businesses at major banks. Like many others who are wary of regulators imposingsize limits on banks, Ludwig argued that regulators should continue to implementthe measures in Dodd-Frank intended to ensure large banking companies can be resolved.
"Shouldn'twe take stock of how these measures are working?" Ludwig said, adding thatpiling even more change on to those companies could ultimately be unproductive."It could be that more change means more problems — more systemic risk,"Ludwig said.