Print Friendly, PDF & Email

Peter Wallison explains why breaking up the big banks, bank critics’ go-to solution to too-big-too-fail, makes no sense:

[Breaking up the mega-banks] does not pass a cost-benefit test. We don’t have any idea what size would make a bank not too big to fail. If JP Morgan Chase were broken into ten pieces, each would be more than $200 billion, and still-according to Dodd-Frank–a threat to the stability of the financial system.

In addition, U.S. companies operating around the world would have to find new sources of short-term liquidity, payroll processing, trade finance, and market expertise; the market for government and private debt securities would lose liquidity as the principal market-makers backed off; and financial institutions and end-users of all kinds would find their principal source of risk-management for credit, currency and interest rate risk had disappeared. [Emph. added.]

So a breakup of the big banks is impractical and would do a disservice to large global banking customers. Nor, I bet, would it fix the TBTF problem. But it would do wonders for bank critics’ sense of sanctimony. So there’s that. . . .