Breaking Up Behemoth Banks

Thanks to banking industry mistakes and government’s orchestration of its rescue, the country now has ten banks that together command some $10 trillion in assets, roughly equal to nearly 70% of the country’s gross domestic product. Pending legislation would break those up into a total of about 36, each still commanding about $285 billion in assets apiece—larger than the next largest bank is now.

That break up would eliminate the continuing threat to the US economic and political system posed by banks deemed so big that government lavishes trillions in aid to avoid letting them fail—at enormous cost to ordinary citizens and the real economy. It is by far the cleanest and most reliable solution to the manifest havoc massive banks wreak, not addressable by any pending technocratic tinkering like better regulation or capital requirements.

The break-up idea is not as radical as it is controversial, due to foes of ex ante legal constraints on private power.  All passage of the legislation would mean is substantially a return to the scale and distribution of the US banking system as of the mid-1990s, when no bank commanded assets exceeding more than a few percent of GDP. In important part, as the lists below suggest, the conglomerate mergers of the past two decades that caused this massive concentration of economic and political power would be reversed.

If so, expect greater competition, with benefits to consumers, savers and investors; more careful risk management by banks and their lenders, given that they’d no longer enjoy a government guarantee against failure; and generally a less unbalanced economic and political environment in the country that massive bank scale has consolidated.

But don’t count on this legislation to pass. As the bailout showed, the forces at the country’s largest banks are far too powerful for Congress and the President to resist easily.  They’ll need support from ordinary citizens to fight the megabanks seriously.

Listed below are the largest banks in the country, measured by assets, noting which would have to break up under the legislation—and, for the largest four, some of the old brand names that would be revived in the newly-competitive field.

A. The Largest Four (to be divided into a total of about 21)

1. Bank of America ($2.2 trillion; 16% GDP) [Barnett Bank, Boatmen’s Bancshares, FleetBoston, Montgomery Securities, NationsBank, Robertson Stephens, Security Pacific (plus Merrill Lynch from this period’s bailouts)]

2. JP Morgan Chase ($2 trillion; 14% GDP) [Bank One, Chase Manhattan, Chemical Bank, First Chicago, Hambrecht & Quist, Manufacturer’s Hanover (plus Bear Stearns and Washington Mutual from this period’s bailouts)]

3. Citigroup ($1.85 trillion; 13% GDP) [Commercial Credit, Primerica, Travelers, Salomon Brothers]

4. Wells Fargo ($1.24 trillion; 9% GDP)) [CoreStates, First Interstate, First Union, Norwest (plus Wachovia from this period’s bailouts)]

B. Tier Two: The Next Largest (to be divided into a total of about 9)

5. Goldman Sachs ($850 billion; 6% GDP)

6. Morgan Stanley ($771 billion; 5% GDP)

7. MetLife ($771 billion; 5% GDP)

C. Tier Three (to be divided into a total of about 6)

8. HSBC ($391 billion)

9. Tannus ($369 billion)

10.  Barclays ($365 billion)

D. The Next Ten Massive Banks (not needing to be divided)

11. US Bancorp ($281 billion)

12. PNC ($269 billion)

13. BONY/Mellon ($212 billion)

14. Suntrust ($174 billion)

15. GMAC ($172 billion)

16. Capital One ($169 billion)

17. BB&T ($165 billion)

18. State Street ($156 billion)

19. Citizens ($148 billion)

20. TD Bank ($145 billion)

Data: Federal Reserve

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6 Responses

  1. Frank Pasquale says:

    Brilliant, important points. Thank you so much for breaking it down so persuasively and eloquently.

  2. Ken says:

    We discovered during the Pecora hearings that the malignancy in banking that brought the economy crashing down was caused by retail/commerical banks combining with investment banks, brokers, and speculators. We passed a simple law, Glass-Steagall, to prevent that. For the next half-century our banking system was boring, but healthy.

    Then, in our infinite naivete/gullibility, we let the speculators convince us (not me, but the royal “us”) that the best regulation was the implicit regulation of the unfettered marketplace, where weak players and bad ideas would naturally fail, while good ideas and strong players would succeed.

    Sadly, this was a case of total amnesia. We totally forgot that the worst combination was strong players with bad ideas.

    What is surprising to me is that we still have that selective amnesia. We bandy about terms like “regulation” while most of our legislators probably STILL haven’t heard of Pecora, let alone read the details of what he uncovered, and how successfully we avoided the repetition for a half century.

    The idea of “breaking up” the huge banks dovetails nicely with the idea of forcing banks back into the banking business, to the exclusion of insurance, brokerage, and speculation. If we break up the “financial one-stops” and separate their functional components, I suspect we will find we’ve simultaneously gone a long way to leveling the sizes, too.

  3. zephyr teachout says:

    Great post, and well put. More controversial than radical is exactly right.

    Although its true that its a long shot, the numbers aren’t as skewed as you might think, with the New York Times editorial page weighing in in favor of breaking up the banks this morning. As Simon Johnson and Robert Reich have pointed out, there is zero evidence that banks larger than $100 billion in assets are more useful by any metric.

  4. Yet another interesting piece by Hiltzik in today’s Times: “Bankers trot out tired, old arguments against financial overhaul”—,0,1276219,full.column

  5. Completely random comment — would Chemical Bank be revived as a name? The Chemical name didn’t survive the merger with Texas Commerce Bank, which preceded the merger with Chase Manhattan, which preceded the merger with J.P. Morgan. Though Chemical was bigger, no one liked the name Chemical very much, so kept Texas Commerce Bank (TCB). Sorry, former client, can’t help myself.

  6. Ken says:

    Christine, Thomas Wolfe said it (posthumously) 70 years ago. And the older I get, the more often it seems to come up.

    I too had a former client (software, not legal) that got lost in the mergermania. Virginia National Bank (VNB) was one of the best run, and most successful, of the regional banks. VNB acquired some banks in various south-Atlantic states and decided to lose their “local bank” identity by changing their name to Sovran Bank. Then North Carolina National Bank (another of the best run, and most successful) merged with Sovran. Once again, intending to amplify their image, they became NationsBank. They were still among the best run and most successful.

    Alas, “best run and most successful” became just a fond memory when NationsBank merged with Bank of America. Although Nations was the “senior” partner in the merger, they decided to keep the Bank of America name because of its international presence. Sadly, we soon found out that “international presence” meant a lot of bad South American loans, and the downhill slide began.