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End “Too Big to Fail,” not “Too Big” Banks

Senator Sherrod Brown (D) has called for breaking up America’s biggest banks. His Safe, Accountable, Fair & Efficient (SAFE) Banking Act would ostensibly “end ‘Too Big to Fail’ policies” while placing allegedly “sensible size limits on our nation’s large financial institutions.”

Brown had previously teamed with Senator David Vitter (R) in a letter to the GAO requesting a study to “examine ‘the economic benefits that bank holding companies with more than $500 billion in assets receive as a result of actual or perceived government support,’” such as whether “having TBTF [“too big to fail” protection] guarantees gives large investment institutions sizeable advantages over rivals, especially in lowering their borrowing costs.” Their bill to that effect recently passed the Senate.

George F. Will endorses Brown’s approach of bank-busting, and urges conservatives to do likewise:

By breaking up the biggest banks, conservatives will not be putting asunder what the free market has joined together. Government nurtured these behemoths by weaving an improvident safety net, and by practicing crony capitalism. Dismantling them would be a blow against government that has become too big not to fail.

But Will is pointing conservatives toward a statist trap.

Will notes that there is “no convincing consensus” about what size a bank should be. Will also notes that Brown himself “is undecided about whether the proper metric for identifying a bank as ‘too big’ should be if its assets are a certain percentage of GDP—he suggests 2% to 4%—or simply the size of its assets.” Brown’s uncertainty, however, didn’t restrain him from imposing strict limits on banks’ size in his SAFE act.

How can anyone determine which successes or failures of a given bank are consequences of “Too Big to Fail” policies and which are consequences of free-market phenomena and wise or unwise policies on the part of the bank’s management?

Government has no right to dictate the size of any bank (or any other business). And if government is granted the power to limit the size of banks, what will be the implications for other industries and businesses? As Will acknowledges, “banks are not the only entities designated TBTF,” noting General Motors was bailed out based on the notion that it is “systemically important.” Will the government be free to limit the size of automobile makers? Computer makers? Insurance companies? News outlets?

In a free market (as opposed to today’s highly regulated market), a bank grows by offering services for which clients are willing to pay and by maintaining financial strength—all of which, in turn, increasingly attracts depositors, borrowers, and investors. Since there are no special economic advantages like the TBTF “safety net”—or what Will eloquently calls “the pernicious practice of socializing losses while keeping profits private”—a bank can never grow “too big.” If the bank continues to offer marketable services and to maintain financial strength, then, for its customers and stockholders, the bigger it grows the better. If the bank’s quality and strength begin to deteriorate, then its customers will complain or move their business elsewhere, and its management and stockholders will have to make some rational decisions about how the bank will proceed. Absent someone engaging in fraud or the like, government has no role in any of this.

SAFE is an immoral intrusion into the voluntary association of banks and their customers. Advocates of liberty must oppose any government role in determining the size of banks. We must fight to repeal all such rights-violating policies and agencies, and to establish fully free markets in banking.

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Creative Commons Image: Keith Allison

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