In a recent televised interview, investor Warren Buffett said of America’s biggest banks: “Our banks are not as large, relative to the economy, remotely as in many other countries, and our banks are in better shape than much of the rest of the world’s. I think the present banking system is a pretty damn good system for the United States.”
Mr. Buffett is right. The United States is blessed to have a diverse financial system, one in which community banks, regional banks, large banks, as well as non-bank financial institutions all play a role in our economy, helping American businesses raise capital to grow, while allowing consumers to save for the future.
Much has changed since the 2008 financial crisis. Congress and the regulators have overhauled the rules for our capital markets — and sometimes the pendulum has swung too far inhibiting reasonable risk taking for businesses. However, what is undeniable is that bank capital has doubled, leverage has decreased, compensation practices have been reformed to align employee incentives with long-term performance and consumers have strong new protections.
Despite these developments, some politicians are ratcheting up populist sentiment as we head into the 2016 election cycle. Some are arguing that we should break up “too big to fail” banks. This ignores some basic facts, including the tough choices the United States has made to move forward from the economic precipice we faced in October 2008.
Back then the federal government encouraged banks like Bank of America, JPMorgan, and Wells Fargo to acquire their troubled peers like Merrill Lynch, Bear Stearns, Washington Mutual and Wachovia, thus protecting the economy from the instability, fear and chaos that other bankruptcies — like Lehman Brothers— would have caused. And facts can be stubborn things. Since 2011, those large banks have actually been shrinking, some very rapidly.
Furthermore, the proposed solution we often hear to the perceived “too big to fail” problem—a reintroduction of the 1930s era Glass-Steagall Act — misses the mark for how businesses use banks and why our diverse system sustains the world’s largest economy. Re-imposing Glass-Steagall would require universal financial firms to split up into separate commercial and investment banks.
This 1930s-era solution wouldn’t have prevented the 2008 financial crisis and doesn’t work in a 21st century global economy. In 2013, a Chamber survey, “How Main Street Businesses Use Financial Services,” interviewed more than 200 chief financial officers and corporate treasurers. This survey found that businesses use multiple financial services firms to meet their financial services needs with 62 percent using five or more firms and 25 percent using 10 or more firms. Businesses need global, national and community banks to meet their everyday cash management and long-term capital demands.
In an inter-connected global economy, America’s global banks help companies like John Deere compete for business and find customers around the world, boosting exports and U.S. jobs. Breaking up our banks will mean more business for Chinese banks (which are much larger than ours, as Warren Buffet pointed out), but it won’t do much for America.
If you are an American company trying to close a large deal, it is easier and less costly to have one firm provide financing than to get 30 organizations in a room. Consumers are also living in a rapidly changing financial world — online lending, mobile payment options, a wide variety of affordable investment and retirement options and the emergence of peer-to-peer borrowing and lending networks.
It is now possible to bank with a single large financial institution and pay a mortgage, deposit a check, save for college, pay for coffee — and never even take out your wallet. A 21st century U.S. economy needs a strong, flexible and innovative 21st century financial system, not a pencil-and-ledger Roosevelt-era system.
Even Sen. Elizabeth Warren has conceded to The New York Times that the repeal of Glass-Steagall restrictions did not cause, nor would Glass-Steagall have prevented, a financial crisis that followed the collapse in housing prices in 2007.
America’s economy is poised to take advantage of all the technological innovation in financial services. But to do so, we need thoughtful, forward-looking leadership and smart regulation, not nostalgic proposals like Glass-Steagall that will only hurt our economy by attempting to turn back the clock more than 80 years.
Thomas J. Donohue is the President and CEO of the U.S. Chamber of Commerce. Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions for editorials, available at this link.
