In his column this past weekend, none other than George Will himself joins the new drumbeat emerging among conservatives that the big banks be broken up. He really ought to know better. Will says he objects in particular to the credit-cost advantage the big banks are said to have, thanks to their implicit government backing, from being too big too fail. He also doesn't like the big banks' complexity, although it's not clear why.
What's happened to the poor guy? Even if the problems Will cites are as bad as he says (and I doubt it), there are fixes to them that are far less radical than the breakup of the country's largest financial institutions. (And make no mistake about it, such a move would be radical. If Bank of America were broken up into pieces smaller than the $100 billion limit on assets that Dallas Fed president Richard Fisher has proposed, for example, the company would atomize into 22 separate institutions. JPMorgan Chase would turn into 24 institutions.) That's awfully radical surgery to counter a supposed 50-basis-point credit-cost advantage. Why not just charge the big banks even more—on top of the premium hike that was included in Dodd-Frank--for federal deposit insurance, and be done with it? And by the way it's not at all clear that any credit-cost advantage the big banks have is because they're supposedly too big to fail. They're also more broadly diversified, both by product and geography, than community banks are. Maybe that's why their credit costs are lower.
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As for the complexity that troubles Will so, some of us prefer to see it as "diversification." The fact is that the big institutions that ran into the most trouble following the housing bust —companies like Washington Mutual and Countrywide—were the sort of one-product wonders that George Will seems to believe ought to be the model financial institutions of the future. That's nuts. There are a lot of reasons why companies such as JPMorgan and Wells Fargo came through the crunch as well as they did (they were superior mortgage underwriters, for one thing), but critics persist in ignoring the fact that their mortgage businesses are just one of many in the companies' portfolios, and that strength in those other businesses played a big role in offsetting their mortgage losses. This is business school 101. George Will should understand it.
Meanwhile, despite what their critics seem to think, large global financial institutions really do add value, believe it or not—notably by doing an especially effective job providing a broad array of financial services to large global companies. A handful of smaller providers just can't do that as well. That's why big companies prefer to deal with banks like BofA and JPMorgan in the first place!
I understand why calls for the breakup of the big banks keep coming from certain quarters. Some people just don't like the idea of large, global financial institutions, and honestly believe (wrongly, in my view) that the people who run them are blood-sucking plutocrats who nearly ruined the world and who need to be brought down a few pegs. Fine. I get that. And I understand, too, why the Republicans want turn themselves into bank-bashing populists to get in sync with tenor of the times. They're politicians. It's their job.
But isn't it possible for someone in a position of responsibility to propose a banking policy for the country that's based on something other than retribution and near-term political gain? A breakup of the big banks would be a disruptive disaster that would weaken the U.S. financial system and clog the creation of credit. And if it leaves us (as it would) with more Countrywides and fewer Wells Fargos, the financial system would be more fragile, not less so, heading into the next crisis. That would be insane.
Breaking up the big banks is a terrible idea, regardless of what George Will says.