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Reasons to Support Limiting the Size of Banks

Sep 12, 2010 Brian Bradley

In last week's blog, Financial Institutions Too Big To Fail, I discussed limiting the size of banks and the proposed Brown-Kaufman amendment. Brown-Kaufman has generated a real debate and many pro arguments were heard, as well as against. To further the discussion let's take a look at some supporters' opinions.

As we've seen, megabanks' far reaching connections to other financial institutions can cause substantial troubles on a large scale throughout the financial system if they become unstable.

Breaking down the size of megabanks and capping the size of financial institutions would prevent their individual failure from bringing down the entire system.

The amendment would end taxpayer-financed bailouts by ensuring that no financial institution becomes "too big to fail". 

Regulating the size of banks so that they do not become too big to fail protects American markets from increased competition overseas.

Senator Ted Kaufman, Democrat of Delaware, who is a co-sponsor of the bill, said that the Federal Reserve has had the power to limit the size of banks since 1970, but has not acted. Instead, the nation's six largest bank holding companies have only grown bigger over the last year and a half, mainly as a result of government-brokered mergers. They can now borrow at significantly lower rates than their smaller competitors, a result of the bond market's implicit assumption that the government will never allow them to fail.

Supporters of this bill consider that even though it is not perfect, it's a huge improvement on the regulatory status quo that allowed the American economy to plunge into one of the worst downturns since the Great Depression. As former Fed chairman and White House advisor Paul Volcker told The New York Times: "You have a crisis, followed by some kind of reform, for better or worse, and things go well for a while, and then you have another crisis."