The financial crisis showed that Depression-era regulatory structures aren’t good enough to protect the modern economy from Wall Street risk-taking, Treasury Secretary Jack Lew said Wednesday at CNBC’s Delivering Alpha conference in New York. The comments come a week after Sens. Elizabeth Warren (D-MA), John McCain (R-AZ), Maria Cantwell (D-WA), and Angus King (I-ME) introduced legislation reinstating one lapsed Depression-era rule that would force the largest financial companies to break up.
Yet while Lew’s speech seemed to discount the senators’ effort, one remark in the question-and-answer session hinted that that attitude could change. When CNBC’s Steve Liesman asked about efforts to break up the banks, Lew said he shares the senators’ goal of ending “Too Big To Fail,” adding that “if we get to the end of this year and we cannot with an honest straight face say that we have ended Too Big To Fail [through existing reforms], we’re going to have to look at other options.”
That extemporaneous comment goes further than Lew’s prepared remarks. “Regulators were operating under a structure that was largely designed in the aftermath of the Great Depression and was out of step with the far more complex modern marketplace,” Lew said in the speech, arguing outdated policy facilitated industry abuses. The broad statement highlighted a disagreement between Treasury and reform-minded senators over just how to address the problem of bank size.
Many experts, including one banker who supported it at the time, blame the repeal of the Depression-era Glass-Steagall Act for enabling banks to become “Too Big To Fail” and thereby endangering the broader economy. That law had separated investment banking from federally-insured traditional bank activity involving consumer deposits. In the years after President Clinton signed the repeal of Glass-Steagall, the banking industry rapidly consolidated. Today, about seven of every $10 in bank assets is controlled by just 12 banks, or 0.2 percent of total banking companies.
That’s why Warren, McCain, and the rest are proposing the 21st Century Glass-Steagall Act, which would resurrect the legal divide between commercial and investment banking while updating it to put it back in step with the “complex modern marketplace” Lew described in Wednesday’s speech.
Later in his address, Lew emphasized the importance of completing various new rules required by the Dodd-Frank reform package of 2010, and said the “core elements” of the bill will all be finished by the end of the year. “I want to mention that the Volcker Rule is particularly important,” he said, “and I will continue to push for swift completion of a rule that keeps faith with the intent of the statute and the President’s vision.” But if the Volcker Rule – a compromise approach to dividing commercial and investment banking that would not require banks to break up – fails to end Too Big To Fail, the administration might join the more aggressive push from Warren, McCain, and their colleagues.
This post has been updated to clarify the relationship between Lew’s prepared and extemporaneous remarks.