These States Want Congress To Break Up Big Banks

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"These States Want Congress To Break Up Big Banks"

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A strange pro-bank turnaround at the National Conference of State Legislatures conference marks the latest twist in a largely overlooked effort by state legislators around the country to get Congress to impose real limits on banking giants.

Delaware State Sen. Catherine Cloutier (R) was the sponsor of a non-binding resolution calling on Congress to revive the repealed Glass-Steagall rules, which prohibited “commercial” banks (the kind that gives standard loans) from engaging in investment banking, in theory insulating individual people’s savings from the risk of aggressive Wall Street bets. Though Cloutier had delivered a speech blaming the Great Recession on the repeal of Glass-Steagall when introducing the legislation, she apparently withdrew it on Tuesday night with almost no explanation.

Cloutier did say she had heard “concerns from Delaware” about her resolution, which is unsurprising: Delaware is, as a consequence of lax state-level regulations, the banking and credit card capitol of the country. Nonetheless, other Delaware state legislators have joined their counterparts in 17 states around the country to pushing similar Glass-Steagall resolutions, according to Politico‘s Kevin Cirilli.

These resolutions are non-binding and symbolic. Only the federal government has the ability to reinstate the wall between commercial and investment banking. The idea behind the resolutions, however, is to help Sen. Elizabeth Warren (D-MA) put pressure on the rest of Washington by demonstrating state-level anger over the lack of accountability for the financial collapse. Warren, along with a bipartisan group of Senate allies, is currently pushing a “21st century Glass-Steagall” bill aimed at limiting the ability of commercial banks to engage in risky speculation.

So far, Glass-Steagall resolutions have only passed in Maine and South Dakota, the pairing of one very progressive and one very conservative state reflecting the odd political alliance Cirilli finds to be responsible for the rise of Glass-Steagall resolutions. Relatively progressive Democrats furious about inequality and predatory banking have joined up with libertarians angry about government bailouts to push for a new commercial/investment division.

Whether reimposing Glass-Steagall restrictions could head off another financial crisis is a complicated question. Arguably, the repeal of Glass-Steagall opened the door to a much broader range of financial speculation with a greater amount of assets, creating the sort of concentrated and interlinked risk that led to the domino collapse of banking institutions in 2008. Skeptics, however, note that the most significant 2008 collapses were either not commercial banks or commercial banks that collapsed for reasons other than their own investment banking department’s bets.

It’s also possible Glass-Steagall’s effects were less direct. Economist Joseph Stiglitz believes that the 1999 repeal changed the corporate culture of commercial banks, causing them to think and operate more like investment banks. This new culture led to riskier loan practices of the sort that really did bring down the big banks.

Regardless, even some Glass-Steagall skeptics agree its reinstatement could do some good. “Bringing back something akin to Glass-Steagall would clearly help limit risk in the system,” Andrew Ross Sorkin, a critic of calls to reinstate Glass-Steagall, writes. “Letting banks sell securities and insurance products and services allowed them to grow too big too fast, and fueled a culture that put profit and pay over prudence.”

A new Glass-Steagall may be the most popular new proposal for limiting the risk posed by a bloated financial sector, but it’s hardly the only one. Libertarian economist Luigi Zingales favors regulations that would create a new system of capital requirements and warning signs for bank failure, limiting bank size and their ability to speculate wildly. Paul Krugman has suggested extending traditional regulation to the so-called “shadow banking” system.

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