Sanders is Right: Why We Should Break Up the Big Banks

The presidential campaign has brought new attention to the problem of banks that are too big to fail (TBTF).

As everyone agrees, the largest banks are bigger than ever. As the following chart shows, the share of all bank assets held by the four largest banks rose from 33 percent in 2007 to 41 percent by 2015. Over the same period, the combined assets of the four largest banks, as a share of GDP, grew from 28 percent to 40 percent.

The major candidates disagree, not on whether the largest banks are too big to fail, but on what to do about it. Senator Bernie Sanders has made breaking up the banking giants a centerpiece of his campaign. Hillary Clinton favors a continuation of the regulatory approach embodied in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The GOP candidates favor an approach that combines deregulation with market discipline.

Sanders' anger at the banks seems to resonate well with voters, but influential voices in the media skeptical. The Editorial Board of the Washington Post has argued against breaking up the big banks. The New York Times has done likewise, prominently featuring an opinion piece written by Steve Eisman, a managing director of the investment firm Neuberger Berman. Politico also thinks breaking up the banks would be a bad idea.

I find the arguments of these critics unpersuasive. In what follows, I will examine the three approaches to dealing with the problem of TBTF and explain why I think Sanders is right to think that a reduction in the size and influence of the largest banks should be a part of any comprehensive plan to improve the stability of the financial system. >>>Read more