How to Break Up the Banks?

Senators agree that the banks are too big. But multiple bills and possible amendments circulating on the Hill offer different solutions to that problem. Here is a primer on the main proposals.

The American Financial Stability Act: Sen. Chris Dodd’s (D-Conn.) financial regulatory reform proposal is due to be taken up next week. It imposes “tough” new capital and leverage requirements that “make it undesirable to get too big.” (Dodd has not specified any numbers, leaving that up to regulators.)

It also creates a Financial Stability Oversight Council, to keep an eye on big banks. The Federal Reserve and FSOC can force a bank (or a non-bank financial institution, like an investment bank) to slim down if the regulators determine it poses a danger to the financial stability of the country. But this is only a “last resort.” Additionally, the Dodd bill looks to implement a version of the Volcker Rule — stopping banks from speculating with their own funds, or “prop trading.” But this rule will not be finalized or implemented until FSOC completes a study of it.

The Wall Street Transparency and Accountability Act: Sen. Blanche Lincoln’s (D-Ark.) derivatives reform bill passed out of committee today and will be merged into Dodd’s bill. It makes derivatives trading a less lucrative enterprise by forcing many over-the-counter derivatives trades into clearinghouses, improving price and volume transparency and encouraging competition. The bill helps to limit bank size by forcing financial firms that have access to the Fed discount window to stop trading in swaps, a currently unregulated form of derivative.

The Safe Banking Act: Sen. Sherrod Brown (D-Ohio) and Sen. Ted Kaufman (D-Del.) introduced a new bill to break up the banks today. They say they hope to offer it as an amendment to the Dodd proposal. It mandates hard leverage and size caps on banks and non-banking financial institutions. It limits commercial banks’ assets to 2 percent of GDP, and non-banks’ assets to 3 percent. It also prevents banks from holding more than 10 percent of insured deposits. Finally, it imposes a 16-to-1 leverage cap.

The Return of Glass-Steagall: Sen. Maria Cantwell (D-Wash.) has said she will reintroduce Glass-Steagall-type provisions as an amendment to financial reform. (Glass-Steagall is a Depression-era rule, rescinded in 1999, that banned banks from combining commercial and investment banking functions.) She has the backing of Sen. John McCain (R-Ariz.). Republican Senators Richard Shelby (Ala.), Johnny Isakson (Ga.) and John Cornyn (Texas) have also said they support repealing the repeal of Glass-Steagall.