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Solving Banking’s “Too Big To Manage” Problem

By Jeremy C. Kress. Full Text.

The United States’ banking system has a problem: some financial conglomerates are so vast and complex that their executives, directors, and shareholders cannot oversee them effectively. Recognizing this “too big to manage” (TBTM) dilemma, both major political parties have endorsed breaking up the banks, and bipartisan coalitions in Congress have introduced bills to shrink the largest firms. Despite this apparent consensus, however, policymakers have not agreed on a solution to the TBTM problem. Thus, a decade after the financial crisis, the biggest U.S. banks are significantly larger today than they were in 2008.

This Article contends that the most prominent proposals to break up the banks—by reinstating the Glass-Steagall Act, capping banks’ size, or imposing onerous capital rules—each suffer from critical policy and political shortcomings. This Article then proposes a better way to solve the TBTM problem: using the Federal Reserve’s existing authority to compel divestitures when a financial conglomerate falls out of compliance with minimum regulatory requirements. In contrast to existing break-up proposals, this never-before-used approach would increase big banks’ incentives to comply with the law, reduce the systemic footprint of problematic firms, preserve economies of scale and scope for most financial institutions, and not require new legislation. This Article asserts that the Federal Reserve should use its divestiture authority in appropriate circumstances, and it proposes a novel framework to end the TBTM problem by putting this authority into practice.