Megabanks Are Already Dying  

Simon Johnson, in a bit of a provocation, argued that “the decision to cap the size of the largest banks has been made” already and “all that remains is to work out the details.” On Twitter last night I saw Ben White taking strong exception to this, and White’s article from last week on why Washington won’t break up the banks is recommended reading. Still, I think Johnson is largely correct. My view is that it’s relatively unlikely that we’ll ever see the Big Four Megabanks—that’s Citigroup, JP Morgan, Wells Fargo, and Bank of America—literally broken up. But their days are probably numbered.

One way to see that is just to look at trends in the stock market since the last market peak. Three of the big four have underperformed the broader market index and two of them have underperformed badly. There’s a collective judgment that their fortunes relative to the broader American economy have sunk.

More broadly, ideas do matter. And the idea that we should find one way or another to limit bank size has secured really broad support at this point. And unlike a lot of ideas that have wonky fans on both sides of the aisle but aren’t going anywhere (reconfigure the mortgage interest tax deduction as a flat tax credit!) this one has real politicians behind it. Sherrod Brown has a very real piece of legislation on this. David Vitter appears sincerely interested. And in some ways even more telling, Rep Jeb Hensarling (R-TX) who isn’t on the SAFE Banking Act bandwagon is talking about tighter capital requirements and stricter ringfencing of different lines of business. The lobbies for these banks are still powerful, the senators who represent the places where the banks are located are going to be an important counterforce, and as White says the Obama administration has no interest in reopening this can of worms. But everyone and his cousin is investigating JP Morgan right now there are big questions about Wells Fargo’s balance sheet there’s zero political will for further bailouts and all the momentum in both parties is toward greater skepticism of the big banks.

I’m not sure what the outcome will be. I’m not even sure if the outcome will be on net a more strictly regulated financial system or simply one more tilted toward smaller outfits (be they regional banks or hedge funds). I highly doubt anyone’s going to chop Wells Fargo up into pieces. But the trends are against these institutions. They’ll either shrink relative to the size of the economy naturally, or they’ll be forced to shrink by some combination of regulatory measures.