The US financial services industry was forever changed after Dodd-Frank, and while many brokers and service providers rue its passage, the latest roll call amongst big banks in America may point to even more regulatory action.
The sentiment is echoed by Neel Kashkari, the Head of Minneapolis’ Fed and key player in the 2008 Wall Street bailout that convulsed stock markets. Almost eight years later, big banks are still in the crosshairs of industry officials and regulators, decrying the lack of compliance and oversight facing these entities and the ground that still needs to be covered.
Too Big to Fail, Small Enough to Break
While many Americans are familiar with the term ‘too big to fail’, a popular expression tossed around during the dog days of the 2008 financial crisis, Kashkari’s latest comments point to something else entirely- the systematic breakup of the largest US banking institutions.
The idea is hardly novel and after the recent year many such banks had, specifically in Europe, such a staunch measure may actually be a panacea for diving profit margins. In 2015, some of the largest lenders in the world announced wholesale personnel cuts in the thousands as earnings continued to string together disappointing performances – this included Deutsche Bank and Standard Chartered, among many others.
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While US banks have not yet suffered from similar measures, it is clear that the golden age of banking giants such as Bank of America, Goldman Sachs, and Citi has long since ended, given the litany of recent probes, allegations, and eroding earnings reports.
Interestingly, Kashkari has floated the idea of not only breaking up big banks but adjusting the overall framework of their business entirely, thereby turning them into ‘public utilities’, forcing them to hold onto so much capital that they cannot possibly fail, according to a recent report from the FT.
Kashkari’s words also touch on a sense of urgency, notwithstanding a growing specter of doubt that banking institutions in the US have fully righted the ship after the throngs of the 2008 financial crisis. He went a step further however, warning that large financial institutions pose a ‘nuclear threat’ to the US economy, which has showed uneven signs as of late, prompting varying degrees of Fed intervention.
According to Kashkari, “Now is the right time for Congress to consider going further than Dodd-Frank with bold, transformational solutions to solve this problem once and for all.”
“A very crude analogy is that of a nuclear reactor. The cost to society of letting a reactor melt down is astronomical. Given that cost, governments will do whatever they can to stabilise the reactor before they lose control,” he added.
The issue has also been picked up by 2016 presidential hopefuls, namely Vermont Senator (D) Bernie Sanders, who has repeatedly called for a break-up of the biggest US banking institutions coupled with new tax proposals on financial transactions.