The biggest banks were already huge before the financial crisis, and concentration in the banking industry was in fact one of the causes of the crash. Yet they have gotten even bigger since then. Just 12 banks, 0.2 percent, control nearly 70 percent of total bank assets, and the 20 biggest hold assets equal to nearly 85 percent of the country’s entire economic output.
This has many concerned that the problem of too big to fail still hasn’t been resolved since the passage of the Dodd-Frank financial reform act. Worse, banks may now be too big to jail, as the Justice Department has warned that going after potentially illegal behavior could have negative economic consequences.
These problems led Sen. Elizabeth Warren (D-MA) to grill Treasury Secretary Jack Lew at a Senate banking committee hearing on Tuesday about whether the time has come to cap the size of banks and/or break them up:
As she noted, the four biggest banks, which were already considered too big to fail before the crisis, are now 30 percent larger. “When we see the largest financial institutions getting bigger and bigger…it tells us that we are clearly not on the path to resolving too big to fail,” she noted. This is potentially putting the economy at risk. Later she cautioned that “we’re playing with the U.S. economy here, the worldwide economy.”
Yet no action has been taken to address this specific problem. “How big do the biggest banks have to get before we consider breaking them up?” she asked Lew. “Do they have to double in size? Triple in size? Quadruple in size?” While Dodd-Frank is in the process of being implemented and these changes to the law may mean some changes, the continuing stream of scandals in the sector show that “they have not changed their risk bearing practices nor have they decided that they’re suddenly going to start following the law,” she said.
Warren is not alone in cautioning that too big to fail is still a potential problem. Federal Reserve Chairman Ben Bernanke recently agreed that something needs to be done. Sens. Sherrod Brown (D-OH) and David Vitter (R-OH) also introduced legislation in April to rein in megabanks by imposing strict capital requirements, among other changes.