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Why it might be time to break up big banks

The head office of JPMorgan Chase rises over Park Avenue in midtown Manhattan on July 13, 2012 in New York City. As banks face scrutiny over questionable practices, Chris Farrell explains why breaking up some of our biggest banks would solve a lot of problems.

Jeremy Hobson: The LIBOR scandal comes on the heels of the monster JP Morgan trade-gone-bad, which has already cost the bank billions of dollars. And that comes just a few years after the subprime mortgage collapse in which nearly all the big Wall Street financial institutions took outsized risks were deemed "too big to fail" -- the banks were. So what can be done to keep these problems from happening?

Marketplace economics correspondent Chris Farrell joins us to discuss. Good morning.

Chris Farrell: Good morning, Jeremy.

Hobson: Chris, it's just scandal after scandal from these big Wall Street banks. What can be done about this?

Farrell: Well, I think we need to break them up. I really do. And there's a simple way to break up the big banks, and that is to dust off the 1933 Glass-Steagall Act. It's a very short piece of legislation, and most of us are pretty familiar with it. We're comfortable with the notion that we're going to separate this investment banking and this trading from institutions that take deposits from you and me. It worked for about 60 years.

Hobson: What about the argument, though, that some would make that if we break up our banks, there are still going to be these behemoth banks in the Netherlands and Switzerland and the U.K. that will be doing investment banking and consumer banking, and we'll just be at a disadvantage?

Farrell: I don't see the problem, because that was true for most of the post-World War II era. I mean, the universal banks of Switzerland and Germany -- and the U.S. grew to be the largest economy in the world. But we had a banking system that largely supported Main Street rather than Main Street having to support or do what happens to the financial system.

Hobson: Did we miss our opportunity to do big banking reform like this? I mean, we've already passed the Dodd-Frank financial reform law. Chris, that was a hard thing to get through Congress; it's very complicated. Didn't we miss our chance to do another big re-do of Wall Street banks?

Farrell: Jeremy, I'm not laughing at you, but I'm just sort of thinking, now look: We went through the whole Lehman Brothers collapse, now we've got the JPMorgan and its trading losses; now we have the LIBOR scandal. I mean, here's the thing: The banking industry is going to give us plenty of opportunity to embrace reform again. And what I would urge is let's make the change now before the next big scandal.

Hobson: Marketplace economics correspondent Chris Farrell. Thanks as always.

Farrell: Thanks a lot.

About the author

Chris Farrell is the economics editor of Marketplace Money.
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And if there is too much negativity and blockage among Congressmen to split up the banks...issue a new charter to bankers who want and support new safe commercial savings banks! There is a one-two punch that will turn the economy around and protect Americans from one percentage interest while the CEO's are pocketing billions while risking life long savings!
Jason from http://paydayloansat.com/immediate-payday-loans/

"Simply, the needs of the global economy — including the needs of very large U.S. Corporations — are of a size and scale that they simply can't be met by small firms."

The same thing was said about Canadian banks. That unless they were allowed to merge and become larger, they would not be able to compete in the global economy. History has proven that contention false:

http://www.thestar.com/business/article/660430--canadian-bank-mergers-hi...

"...Canadian banks tried to merge in the late 1990s, arguing they needed to become global players, or risk becoming irrelevant.

Now chief executives at Canada's biggest banks say the crisis has showcased the resilience of the national banking system to the financial turbulence that has brought some of the mightiest global institutions to their knees.

"This concept of having to be bigger to be successful has been proven to be a flawed strategy," Royal Bank of Canada Chief Executive Gord Nixon told Reuters in a recent interview..."

1) Canadian banks are already HIGHLY concentrated.
2) Canadian banks don't do much global banking. In fact, a lot of the global banking and market-making big Canadian businesses need (agribusiness, commodities) is performed by US banks (and other much bigger, global banks).

So it's easy for Canada to have smaller banks (even if they are highly concentrated), because Canada has the benefit of being able to work with US and British banks.

Bank scandals have nothing to do with bank size. Libor issues existed during Glass-Steagall, as did know-your-customer issues. In fact, I suspect these types of issues were more extensive in the past before consolidation. See my piece from last week on this issue.

When it comes to regulating banks, our goal should be to ensure all banks have sufficient capital and liquidity to survive severe economic stress -- not to reduce bank size.

The reality is that the current global economy is far different from the immediate post-WW II years. In the past 20 years alone, financial assets (not derivatives) have increased 4 times the rate of the global economy. Over the same time period, cross-border flows including things like FDI and equity purchases have increased tenfold. Global foreign exchange activity tops $4 trillion a day.This is not 1960 economy anymore. Simply, the needs of the global economy — including the needs of very large U.S. Corporations — are of a size and scale that they simply can't be met by small firms.

We need global banks to meet global needs. And we want our banks, which we can better regulate, to be able to compete. Rather than hinder our banks competitiveness, lets ensure their safety and leave bank size to the market.

See my two recent articles on these issues:

"Shrinking Banks will Not Fix LIBOR"
http://www.hamiltonplacestrategies.com/in-the-news/articles/reich-is-wro...

"Small U.S. Banks in a Big World?"
http://www.hamiltonplacestrategies.com/in-the-news/articles/small-u-s-ba...

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