New regulations: Cutting banks down to size

President Obama has proposed limiting the size of banks and resurrecting the long-standing separation between commercial and investment banking.

It’s the end of “too big to fail,” said Felix Salmon in Reuters. In an attempt to prevent a repeat of 2008’s meltdown of the banking and financial industries, President Obama has proposed a new set of regulations that would limit the size of banks and bar them from “gambling” on risky investments. The new proposal, which Obama announced with the august Paul Volcker, former chairman of the Federal Reserve, at his side, would impose limits on the size of banks, by restricting the amount of liability they could take on. It would also resurrect the long-standing separation of commercial banking, where profits are derived from interest on loans, from much riskier investment banking, in which institutions “gamble” on hedge funds and other speculative investments. Obama said his plan, which is being submitted to Congress, would prevent banks that receive federally insured deposits from taking “huge, reckless risks in pursuit of quick profits and massive bonuses.”

Is that “the stench of cheap populism” that we detect? said National Review Online in an editorial. Now that the public is angry with Obama, “he wants people to know he’s angry, very angry, at Wall Street.” But it won’t be long before banks will invent new ways to circumvent any new prohibitions on risky trading. The fundamental problem that Obama’s proposal doesn’t address, said Sebastian Mallaby in The Washington Post, is that bankers know that the government won’t let them go bankrupt. “Armed with an implicit government guarantee,” they will always take on unwise risks, knowing that when they win their bets, “the profits go to bankers and their shareholders.” When they bet wrong, taxpayers absorb the losses.

Subscribe to The Week

Escape your echo chamber. Get the facts behind the news, plus analysis from multiple perspectives.


Sign up for The Week's Free Newsletters

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

From our morning news briefing to a weekly Good News Newsletter, get the best of The Week delivered directly to your inbox.

Sign up
To continue reading this article...
Continue reading this article and get limited website access each month.
Get unlimited website access, exclusive newsletters plus much more.
Cancel or pause at any time.
Already a subscriber to The Week?
Not sure which email you used for your subscription? Contact us