BPC Panel Brings Together Top Banking Experts to Debate the Progress of Dodd-Frank in Addressing Too-Big-to-Fail

WASHINGTON, Oct. 28, 2014 /PRNewswire-USNewswire/ -- The Bipartisan Policy Center's Financial Regulatory Reform Initiative (FRRI) hosted a panel discussion today with leading banking experts to break down the arguments for and against breaking up big banks. This public event coincides with the release of a new white paper exploring the same topic, which was authored by the two FRRI co-chairs, Martin Neil Baily and Phillip L. Swagel, as well as Douglas J. Elliott, a fellow in Economic Studies at The Brookings Institution.

The panel discussion featured the co-authors alongside top policymakers and banking experts with a range of perspectives on critical policy questions, such as:

• What are the costs, benefits and consequences of breaking up big banks?
• Would breaking up the banks really work?
• What would it mean for consumers, the financial system and the broader economy?

The new report, The Big Bank Theory: Breaking Down the Breakup Arguments, considers whether the sweeping set of financial reforms put in place by the Dodd-Frank Act have gone far enough to address concerns that our country's largest financial institutions remain too-big-to-fail (TBTF). It also weighs the costs and benefits of policy options that have attracted bipartisan attention, including proposals to formally break up large financial institutions or radically reduce their size. "Examining these questions is crucial to helping policymakers address important concerns arising from the financial crisis," said Swagel, an FRRI co-chair and professor at the University of Maryland School of Public Policy.

Among the report's key conclusions:

• Dodd-Frank has already made considerable progress in addressing TBTF. Higher capital standards and enhanced oversight, as well as new legal authority to resolve large institutions, have sharply lowered market expectations of future government rescues.
• Breaking up the country's largest financial institutions would impose significant costs to the economy. Recent research points to significant economies of scale and scope that promote innovation and economic growth at large financial institutions. The paper also highlights new consumer research on consumer banking behavior in the wake of the crisis, showing that the largest banks significantly increased their number of customer accounts even as a wave of anti-bank populism gripped the nation.
• Breaking up a big bank would be hard to do. Policymakers would need to define the "right" criteria as well as manage significant transition costs of any break-up proposal.

Read the Report

The new report finds that there is little reason to believe that breaking up the largest institutions would reduce risks in the financial system over the long-term and may, in fact, exacerbate them. "Breaking up an institution with $2 trillion in assets would not result in many easy-to-resolve small institutions," said Elliott. "Rather, it would likely result in a smaller number of successor entities, engaged in similar activities as their larger predecessor, but still operating at an impressive scale."

Instead, the report concludes that the measures established by Dodd-Frank serve as a "middle-ground approach," striking a balance between many of the core objectives of the proposals to break-up big banks and a return to the pre-crisis status quo. "These reforms reduce the likelihood of a big bank failing, limit moral hazard, and reduce the risk of future taxpayer bailouts," said Baily, an FRRI co-chair and senior fellow and director of the Business and Public Policy Initiative at The Brookings Institution. "At the least, we should give them time to work before policymakers consider more radical changes."

About the Bipartisan Policy Center
Founded in 2007 by former Senate Majority Leaders Howard Baker, Tom Daschle, Bob Dole and George Mitchell, the Bipartisan Policy Center (BPC) is a non-profit organization that drives principled solutions through rigorous analysis, reasoned negotiation and respectful dialogue. With projects in multiple issue areas, BPC combines politically balanced policymaking with strong, proactive advocacy and outreach. For more information, please visit www.bipartisanpolicy.org.

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