Should big banks be broken up?

By:  US News & World Report – Staff Writer
Source: US News & World Report

Sens. Elizabeth Warren, D-Mass., John McCain, R-Ariz., Maria Cantwell, D-Wash., and Angus King, I-Maine, last week unveiled a bill meant to shrink the nation's biggest banks by bringing back a Depression-era regulation. Dubbed "The 21st Century Glass-Steagall Act," the bill would revive two parts of the Banking Act of 1933 – commonly known as Glass-Steagall – that separated investment banking from commercial banking.

"Despite the progress we've made since 2008, the biggest banks continue to threaten the economy," Warren said in a statement. "The four biggest banks are now 30 percent larger than they were just five years ago, and they have continued to engage in dangerous, high-risk practices." McCain added that the mingling of investment and commercial banking created "a culture of dangerous greed and excessive risk-taking."

The original Glass-Steagall law was chipped away at for years until it was finally repealed in 1999 as part of the Gramm-Leach-Bliley Act (which McCain voted for). But this is not the first time McCain has tried to bring the law back, as he and Cantwell also introduced a bill to revive it in late 2009. At the time, Treasury Department officials derided the idea as akin to "going back to the Walkman."

Under the new bill, banks would have five years to separate their investment bank and broker-dealer operations from their more traditional banking operations, such as those offering savings accounts and home mortgages. Americans for Financial Reform, a pro-financial reform group, said that the bill "would make our financial system safer and focus banks on making sustainable loans to homeowners and businesses." As Bloomberg View's James Greiff notes, "a strict separation of banking and brokers might have prevented lenders from fobbing off some of the garbage they sold to the investing public."

But others are skeptical. "I wouldn't have this approach as high on my list," said Federal Reserve Board Governor Daniel Tarullo. "There's some question as to how much that separation would actually prevent the kinds of problems we saw from developing."