As anger has grown over the bailouts being provided to banks considered “too big to fail,” there has been a discussion gaining momentum about whether or not banks should be allowed to grow big enough that their failure would pose a threat to the national economy. Last week, members of a House committee voted to to give government new power to downsize large private companies that pose this risk, something that till now has only been available in a situation where anti-trust laws have been broken.
The proposal will focus on the 50 largest financial corporations, those with more than $17 billion in assets, and will only be considered if the firms are on the brink of bankruptcy and if their facets are so interconnected that the failure of one will elad to a domino effect that would prove disastrous for the US economy.
Supporters of the movement have said that it is not fair, or economically sound, to allow small banks to fail and keep larger institutions that are not turning a profit alive simply because of their hold on the national economy. By putting a cap on how big these companies can get, they say that the government will create a barrier to companies becoming so influential that they cannot fail, and therefore they will not be able to operate with as much impunity as they could before.
Competition Abroad and Political Concerns
One of the biggest criticisms about this sort of legislation is that even if it is passed in the US, only a handful of these institutions are located there. Also, huge corporations will continue to exist, and huge corporations will continue to require these huge banks to do their banking. If laws are put in place to limit the size of financial institutions in the US, these corporations will only look elsewhere for their financial needs, potentially crippling the US banking industry by making it unable to compete in the global market.
Opponents are also worried that this kind of bill could lead to the eventual dismantling of non-financial institutions as well. Where before large institutions could only be broken up by the government if it started operating as a monopoly, this kind of law could lead political concerns being injected into decisions concerning the breakup of other large corporations.
While there is a desire to find some way to punish large financial corporations for their role in the financial crisis, it is important to consider the potential options, so that any action taken does not cause more harm than it does good.