Over the years the big banks have become even bigger and have taken up an increasingly larger slice of our national economy. There used to be a cap on bank size, limiting them to ten percent of the country’s deposits, but during the financial crisis that went out the window as banks consolidated and bought each other up to stay alive. Stacy Mitchell, Senior Research at the New Rules Project’s Community Banking Initiative, explains what’s going on. She also sees a light at the end of the tunnel in the financial regulatory reform bill:
- Reestablishing
a cap on the size of banks — one small enough not only to limit mergers among giants in the future but to require an orderly break-up of the biggest banks — ought to be a key pillar of financial reform. It’s by no means the only policy needed to curtail systemic risk and rebuild a community-oriented financial system, but it is easily the best and most straightforward tool we have for constraining the concentration of banking power.
Dodd’s financial reform bill lacks a hard cap on bank size, but an amendment put forward by Senator Sherrod Brown of Ohio would strictly limit the size of banks and, if enacted, entail breaking the country’s largest banks into several pieces.
Brown’s proposal fixes several flaws in the current deposit cap, which Congress adopted in 1994 as part of a sweeping deregulation bill that allowed banks to merge and expand across state borders with virtually no restrictions. The cap was added to the bill in order to appease public concerns that a few banks would become too large and powerful. (Those concerns proved well-founded. When the law passed, the top five banks together held 12 percent of U.S. deposits. A mere fifteen years later, the top five account for nearly 40 percent of deposits.)
One problem with the current size limit is that it permits a bank to exceed the cap if it acquires a financial institution that is either in danger of going under or is organized as something other than a commercial bank, such as a savings and loan. These were the loopholes that allowed the Federal Reserve to escort Bank of America and Wells Fargo over the limit in 2008.
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