Congress Should Resist Latest Efforts to Break Up Large Banks

Senator Sherrod Brown (D–OH) offered a budget amendment today that he claims will “end ‘too big to fail’ bailouts.” But the change could ultimately give federal banking regulators more power to break up large banks without really protecting taxpayers.

Section 165 of the Dodd–Frank Act already gives regulators the authority to break up certain banks if they fail to develop a satisfactory resolution plan, a so-called living will. But Dodd–Frank also gives banks a two-year window to resolve any problems that federal regulators might have with their plans.

That grace period has never really satisfied the populist sensibilities of certain politicians. Senator Elizabeth Warren (D–MA), for instance, has hinted that the Federal Reserve should ignore the two-year window and, instead, break up a large bank as soon as its living will is deemed unacceptable.

Senator Brown’s amendment appears to be an avenue to force regulators hand on this issue, but it would do nothing to clear up the ambiguity surrounding this entire “break up the banks” idea. Aside from the fact that only conjecture supports the notion a large bank’s failure will cause an economy-wide disaster, there’s simply no objective way to agree on what the proper size of a bank should be. And there are many reasons to avoid allowing federal authorities to determine the structure of our financial industry.

Perhaps worse, the amendment runs the risk of further enshrining a major section of the Dodd–Frank Act, all of which should be repealed rather than amended. Wanting to protect taxpayers is a commendable goal, to say the least. But further empowering regulators under the guise of maintaining financial stability—a nebulous concept—won’t get the job done.

As pointed out in Chapter 7 of Heritage’s Opportunity for All, Favoritism to None, there are several key policy reforms that Congress can enact to protect taxpayers from future bailouts. Here are just two of those ideas, both of which will go much further to protect taxpayers than any mere amendment to Dodd–Frank’s living will process.

• Amend bankruptcy laws to establish an orderly resolution process for large institutions.
• Permanently shut down Fannie Mae and Freddie Mac.