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‘Too Big to Fail’: Breaking Up Big Banks Is NOT the Answer, Former Regulator Says

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The 2008 financial crisis pushed the global economy to the brink of collapse and exposed major flaws in the financial system. Four years later, most observers agree policymakers whiffed on addressing one of the major causes of the crisis: The difficulty of dealing with financial institutions so large they are considered -- by regulators, the Street and the firms themselves -- as 'too big to fail' (TBTF).

"The TBTF institutions that amplified and prolonged the recent financial crisis remain a hindrance to full economic recovery and to the very ideal of American capitalism," Dallas Fed President Richard Fisher wrote last week. "It is imperative that we end TBTF. In my view, downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the only appropriate policy response."

Fisher's comments prefaced the Dallas Fed's annual report entitled Choosing the Road to Prosperity: Why We Must End Too Big to Fail — Now, which notes (among other things) that the five largest institutions control more than half of the U.S. banking industry assets and the top 10 account for 61% of commercial banking assets vs. 26% 20 years ago.

In addition, the report argues that the Dodd-Frank financial reform legislation "may actually perpetuate an already dangerous trend of increasing banking industry concentration."

In the accompanying video, I discuss the 'too big to fail' issue with James R. Barth a senior fellow at the Milken Institute who has co-authored his own report on the big banks.

Big Banks? No Problem

While Barth agrees with the Dallas Fed about Dodd-Frank being a flawed response to the 2008 crisis, he comes to a very different conclusion when it comes to the issue of 'too big to fail.'

"The problem is not size per se. Big banks are not really the problem," according to Barth who is also the co-author of a new book Guardians of Finance: Making Regulators Work for Us. "The problem is excessively risky activities in which banks engage and banks that operate with too little capital."

Indeed, there is a strong case to be made that the 2004 "Bear Stearns Rule" -- which exempted firms with a market cap above $5 billion from rules capping leverage at 12-to-1 -- was a bigger cause of the financial crisis than the repeal of Glass-Steagall in 1999, which triggered a huge wave of industry consolidation and the rise of mega-firms.

Barth, a former chief economist of the Office of Thrift Supervision, further argues the true cause of the 2008 crisis was a failure of the regulators, not the size of the banks.

"If regulator authorities would do their jobs and make sure banks don't engage in excessively risky activities and operate with sufficient capital then we wouldn't have had as serious a problem as we did just a few years ago," he says.

Barth certainly has a point but there is a fundamental flaw in this logic: allowing banks to grow so large in the first place enabled them to amass the resources and power necessary to "capture" regulators and win passage of industry-friendly reforms, like the repeal of Glass-Steagall, as well as lobbying to prevent Dodd-Frank from being more restrictive on the banking industry.

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at