White House Plan to Break Up Big Banks Stirs Vigorous Debate
Lots of chatter out there about President Obama's proposal to curb banks' size and scope.
James Kwak at Baseline Scenario questions whether the White House has enough congressional support to enact the so-called Volcker Rule, which will require legislation:
Any such legislation has little chance of passing in this session. The (now 41) Republicans had already signaled their intention to kill the Consumer Financial Protection Agency in the Senate, and I was already wondering how the CFPA could survive; banning proprietary trading will be that much harder to pass. (I could be wrong, since theoretically Republicans should want to eliminate implicit government subsidies and increase competition; it depends on how they balance that with their determination to prevent Obama from accomplishing anything.)At the NYT, sources raise concerns that the plan could damage banks' financial performance:
Alan M. Gayle, senior investment strategist for RidgeWorth Investments, said investors were worried about the costs of Mr. Obama's plan to banks, even though the proposal is still far from being written into law.
"Anything that restricts bank's size runs the risk of hurting the international competitive position," Mr. Gayle said. "The concern is that these rule changes could restrict the long-term growth potential in financials."The head of the Securities Industry and Financial Markets Association, a trade group, suggests the plan is misguided:
"We believe providing for strengthened regulatory oversight and flexibility like that originally proposed by the Administration, as opposed to arbitrary restrictions on growth and activities, is a more effective way of mitigating systemic risk and ending 'too big to fail.' said SIFMA president and CEO Tim Ryan in a statement.Roosevelt Institute fellow Mike Konczal echoes the White House line against proprietary trading:
I'll leave it up to you as to whether or not prop trading makes markets a better thing; to the extent that it does it is certainly well compensated, and well provisioned for by the private market. What we don't want is internal hedge funds to be leveraging up and gambling using money that comes with a safety net for preventing devastating bank runs that is provided by taxpayers. In any institution, but especially financial ones, money is fungible. So putting up "walls" to silo off these different functions within one company won't help us â€" we actually need to spin these functions out.Economist Arnold King suggests that tightening restrictions on banks could reduce their political clout:
In principle, I am against attempts by government to structure industries. But I take the view that the political economy of small banks is better than that of large banks. Large banks find it easy to persuade regulators that they are doing wonderful things and find it easy to persuade politicians that they need to be bailed out. Maybe small banks would find this task somewhat harder.Other economists, including Douglas Elliott of the Brookings Instituition, say that completely prohibiting banks from engaging in proprietary trading ignores the value of such services:
The key issue, therefore, is to determine when the risk created by proprietary investing exceeds the gain from allowing banks to engage in a generally quite profitable activity. Some observers clearly believe that proprietary investment almost always creates too much risk to the public. It appears that the administration is coming out on that side after a long period in which it had not placed major emphasis on this issue. My own view is that the situation is more nuanced and that regulators ought to have the ability to set limitations on proprietary investment and to set capital requirements for these activities that are high enough to hold the risk to the public to a very low level.