New regulations: Cutting banks down to size

last updated 8 January 2015

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.

Another round of bank-bashing will serve no one, said Judah Kraushaar in The Wall Street Journal. Right now, banks are still loaded with “problem assets,” and in an uncertain political and regulatory climate, are reluctant to make loans. “Piecemeal” regulations and “sporadic attacks on bank compensation” will only lead to more paralysis. What bankers need most of all is “clarity.” Here’s some clarity, said Megan McArdle in TheAtlantic.com. It was a “gigantic mistake” for banks to announce “huge profits and big bonus pools” so soon after being bailed out by struggling taxpayers. That little bit of arrogance guaranteed a backlash, and for good or for ill, it’s now underway.