Bernie Sanders: "Make banking boring again"

After Sen. Bernie Sanders drew fire this week for failing to detail just how he would break up big U.S. banks in an interview with the New York Daily News, Hillary Clinton suggested he lacks the policy expertise to fulfill his vow to reform Wall Street.

But Sanders may have accomplished a more important feat: shifting the debate from how to police the nation's biggest banks, long the preferred remedy among most Democrats and Republicans, to how to break them up. And on that score the criticism from Clinton, the Democratic front-runner in the presidential race, and from pundits isn't blunting the Vermont lawmaker's tough talk.

"No single financial institution should be so large that its failure would cause catastrophic risk to millions of Americans or to our nation's economic well-being. No single financial institution should have holdings so extensive that its failure would send the world economy into crisis," Sanders said by email on Wednesday, claiming that Clinton's own plan for shoring up the banking system "would only invite more dilution."

"The only way to contain the Street's excesses is with reforms so big, bold and public they can't be watered down -- busting up the biggest banks and resurrecting Glass-Steagall," Sanders said, alluding to the Depression-era law that, until it was struck down in 1999, barred financial institutions from engaging in both commercial and investment banking.

"In 1999, I strongly opposed the repeal of this important legislation. I predicted then that such a massive deregulation of the financial services industry would seriously harm the economy. I would give anything to have been proven wrong about this, but unfortunately what happened to the economy during the financial collapse of 2008 was even worse than I predicted."

As of 2013, the world's 28 biggest global banks had average assets of $1.8 trillion, up from $1.35 trillion in 2006, according to industry data.

Anat Admati, a Stanford University economist and author of "The Bankers' New Clothes: What's Wrong with Banking and What to Do about It," echoes many of Sanders' concerns about Wall Street.

"The big banks pose enormous risk to the global financial system and to all of us -- risk which those in the bank, as well as all their watchdogs and the regulators, are refusing to face up to and control," she said. "I am afraid we will wake up to realize this, once again, when it is too late."

Even after Dodd-Frank, the 2010 financial reform law passed in wake of the housing crash, big global banks retain two features that make them dangerous, said Admati, an influential voice on Capitol Hill.

First, these institutions are opaque, making it hard to spot possible risks lurking within their balance sheets. Second, they're deeply interconnected with other major actors in the international financial system. In such a tightly bound system, disease in one sector can quickly metastasize.

A particular concern, according to Admati and other Wall Street critics, is that large banks are today even bigger users of derivatives, which most experts agree worsened the damage from the subprime meltdown, than before the crash. As of 2015, four Wall Street firms -- Bank of America (BAC), Citigroup (C), Goldman Sachs (GS) and JPMorgan Chase (JPM) -- had total notional derivatives exposure of nearly $190 trillion. The U.S. economy is worth $18 trillion.

"It's a big house of cards," said Admati, who favors barring government-insured banks from using derivatives. "The minute something goes wrong in these markets, there's going to be a monumental collapse. The derivatives market is where fragilities hide."

For critics of Wall Street, the persistent dominance of a few big banks is evidence of a system that's not only more vulnerable, but also one that's not doing its job. For example, big banks continue to enjoy a lower cost of capital than other lenders simply by virtue of their size and implicit guarantee by the federal government, distorting the competitive landscape.

"The reason these banks are so big is simply because it's profitable for them," Admati said. "But that doesn't make them efficient, because some of this profitability comes from privileged and subsidized access to funding. There's no evidence that big banks are efficient beyond assets of $100 billion if we seriously correct for these privileges."

JPMorgan, the country's biggest bank, has assets of $2.3 trillion.

Sanders thinks one goal of financial reform should be to "make banking boring again."

"The function of banking should not be about making as much profits as possible gambling on derivatives and other esoteric financial instruments," he said. "The function of banking should be to provide affordable loans to small businesses to create jobs in the productive economy. The function of banking should be to provide affordable loans to Americans to purchase homes and cars."

There may be other reasons to consider whittling banks down to size. For one, just spotting "systemically important" institutions, let alone regulating them, is dauntingly difficult. That's because, well, things change. As Neel Kashkari, president of the Federal Reserve Bank of Minneapolis and a former investment banker with Goldman Sachs, recently noted, whether a firm is a weak link in the chain depends on economic and financial conditions.

A bank may not look like a major cog in the world's financial gears while the global economy is thriving, in other words. But that can change quickly when financial markets seize, as happened earlier this year amid concerns about China's slowing growth. As economies degrade and panic spreads, that bank may suddenly become a carrier for contagion, according to Kashkari, who also favors breaking up Wall Street banks.

Although Dodd-Frank empowers regulators to shutter a failing bank, in practice that would be virtually impossible given that big banks' sprawling global operations, Admati said. Even if U.S. regulators wanted to shut down a failing Wall Street firm, watchdogs in other countries -- sensitive to domestic financial and political pressures -- might have a different idea.

"The notion you'll be able to [unwind] a big bank in an orderly fashion is a fantasy," Admati said.

Sanders agrees that Dodd-Frank has failed to adequately rein in big banks and safeguard the banking system.

"I voted for Dodd-Frank, but let's not fool ourselves. Dodd-Frank was a very modest piece of legislation," he said, noting that the country's six largest banks control 90 percent of all financial derivatives and hold over 40 percent of all bank deposits. "Dodd-Frank did not end much of the casino-style gambling on Wall Street. In fact, much of this reckless activity is still going on today."

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    Alain Sherter covers business and economic affairs for CBSNews.com.