The Power to Break Up the Big Banks

The idea that behemoth banks should be broken up is widespread and bipartisan, embraced by regulators and politicians alike.

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Regulators—past and present—including Simon Johnson, Richard Fisher and Thomas Hoenig have offered public support for downsizing and reforming “too big to fail banks.”

The latest to publicly embrace the idea is Sheila Bair, the Republican-appointed FDIC chair who was critical in dealing with the financial crisis.

Politicians also have become supportive of breaking up the big banks. Chief among them is Jon Huntsman, who made this issue the central focus of his presidential campaign, but even Newt Gingrich has expressed sympathy for splitting up financial institutions. The conservative media also has gotten into the act. The idea has garnered support from Bill Kristol of the Weekly Standard, Charles Gasparino of the Fox Business News Network and Arnold Kling of National Review, to name a few.

So, how do regulators actually do it?

They can use section 121 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 121 gives the Federal Reserve and the Financial Stability Oversight Council the authority to mitigate the “grave threat” that a financial institution poses by limiting the bank’s activities or forcing it to divest assets—in other words, the authority to break up a bank into separate institutions.