When regulators from around the world—including the U.S. and the E.U.—determined in 2008 that the banking system was terribly under-regulated, they all suggested a similar fix: Separate the departments involved in investment banking from those that deal with more run-of-the-mill insured deposit-taking. But recently there has been some back-sliding on such separation, and finance is still dominated by giant banks that mix the two.
Yet separation makes a lot of sense. Why should to two such wildly different activities as investment banking and retail banking be bundled together in the same institution? It’s obvious what JPMorgan gains: a nice piece of ballast to offset embarrassing, high-stakes trading mishaps. But what about consumers? How does an ordinary person benefit from putting her deposit into a complex global bank? I have asked that question to experts for more than a decade and have yet to hear a satisfying answer.
Breaking up the banks in this way isn’t a proposal confined to the political fringes. Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis—as well as a former banker and a Treasury official during the brunt of the crisis—argued in a recent speech that the too-big-to-fail problem has not been solved by current regulation: The failure of more than one bank in an economic downturn would still have enormous economic costs. His suggested options include breaking up large banks, turning large banks into public utilities, and taxing leverage to reduce systemic risk. He gave short shrift to those who argue that remedies like this could be disruptive, saying, “Those potential shortcomings must be weighed against the actual risks and costs that we know exist today…Better and safer are reasons enough to act.”