# What would be the downside of splitting up the big banks? **URL:** \ **Category:** Great Debates\ **Created:** [January 17, 2013, 10:26pm UTC](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555 "2013-01-17T22:26:30Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![iiandyiiii](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/iiandyiiii/32/7924_2.png) [@iiandyiiii](https://boards.straightdope.com/u/iiandyiiii)\ **Post date:** [January 17, 2013, 10:26pm UTC](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555/1 "2013-01-17T22:26:30Z")
To avoid “too big to fail” or “too important to prosecute”, I propose (for the purposes of this question) we pass a law that any financial services company bigger than X must split up into multiple companies smaller than X- this ceiling of X remains forever after (perhaps to be raised periodically to keep up with inflation). What are the downsides? ---
**Author:** ![Amateur\_Barbarian](https://avatars.discourse-cdn.com/v4/letter/a/59ef9b/32.png) [@Amateur\_Barbarian](https://boards.straightdope.com/u/Amateur_Barbarian)\ **Post date:** [January 17, 2013, 10:54pm UTC](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555/2 "2013-01-17T22:54:51Z")
More bankers. **shudder** ---
**Author:** ![Jas09](https://avatars.discourse-cdn.com/v4/letter/j/d07c76/32.png) [@Jas09](https://boards.straightdope.com/u/Jas09)\ **Post date:** [January 17, 2013, 11:07pm UTC](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555/3 "2013-01-17T23:07:39Z")
Well, in theory, larger banks benefit from economies of scale and therefore are more efficient than smaller ones. So you would, if this were the only factor, expect higher fees and interest rates from banks in order to recoup this lost efficiency. ---
**Author:** ![artemis](https://avatars.discourse-cdn.com/v4/letter/a/91b2a8/32.png) [@artemis](https://boards.straightdope.com/u/artemis)\ **Post date:** [January 17, 2013, 11:17pm UTC](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555/4 "2013-01-17T23:17:48Z")
They’re definitely more efficient at driving the global economy into the ground. Maybe the higher fees and interest rates the smaller banks would have to charge would be best seen as a form of insurance, which we’d pay to ensure a sloppily run bank couldn’t take the whole US economy down with it? ---
**Author:** ![marshmallow](https://avatars.discourse-cdn.com/v4/letter/m/df705f/32.png) [@marshmallow](https://boards.straightdope.com/u/marshmallow)\ **Post date:** [January 18, 2013, 2:41am UTC](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555/5 "2013-01-18T02:41:38Z")
> [@artemis](#): > > They’re definitely more efficient at driving the global economy into the ground. That’s just an externality. ---
**Author:** ![Dick\_Dastardly](https://avatars.discourse-cdn.com/v4/letter/d/c4cdca/32.png) [@Dick\_Dastardly](https://boards.straightdope.com/u/Dick_Dastardly)\ **Post date:** [January 18, 2013, 5:36am UTC](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555/6 "2013-01-18T05:36:53Z")
> [@Jas09](#): > > Well, in theory, larger banks benefit from economies of scale and therefore are more efficient than smaller ones. So you would, if this were the only factor, expect higher fees and interest rates from banks in order to recoup this lost efficiency. In theory they should but in practice they gouge every customer for as much as they can get out of them in every situation. More banks would equal more competition. What they mean by breaking up the banks is splitting the investment banking/casino part from the depository part so that customers’ deposits can’t be used to gamble on the markets. Also to make sure no one institution is so crucial to the financial system that if it went bust it would require the whole system to be bailed out. So basically bringing Glass-Steagall back and making sure the failure of an institution(s) wouldn’t blow the whole system up. I think there’d be an increase in competition if they did this and prices for borrowers and investors/business would go down overall (especially if we did stuff like regulating LIBOR and the derivatives market). The downside would be we’d never again get the opportunity to bail the financial system out with trillions of dollars of taxpayer money and guarantees. We’d never again have a zombie banking system disguising their debts and refusing to make loans again while they were still so bust. ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [January 18, 2013, 4:43pm UTC](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555/7 "2013-01-18T16:43:33Z")
> [@Jas09](#): > > Well, in theory, larger banks benefit from economies of scale and therefore are more efficient than smaller ones. So you would, if this were the only factor, expect higher fees and interest rates from banks in order to recoup this lost efficiency. The economies of scale flatten out after a while and the loss of competitive pressures that you get when you only have a few very large banks probably more than counters the impact of any economies of scale for banks after they get “big enough” ---
**Author:** ![iiandyiiii](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/iiandyiiii/32/7924_2.png) [@iiandyiiii](https://boards.straightdope.com/u/iiandyiiii)\ **Post date:** [January 18, 2013, 5:29pm UTC](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555/8 "2013-01-18T17:29:58Z")
Have any politicians put forward this kind of plan? If not, is it because the big banks have so much power and influence and don’t want that power and influence to wane? ---
**Author:** ![ralph124c](https://avatars.discourse-cdn.com/v4/letter/r/8797f3/32.png) [@ralph124c](https://boards.straightdope.com/u/ralph124c)\ **Post date:** [January 18, 2013, 5:53pm UTC](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555/9 "2013-01-18T17:53:28Z")
> [@iiandyiiii](#): > > Have any politicians put forward this kind of plan? If not, is it because the big banks have so much power and influence and don’t want that power and influence to wane? No..the giant banks make sure that they contribute lots of $$ to these politician’s reelection funds..gotta keep things honest. ---
**Author:** ![Hermitian](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/hermitian/32/470_2.png) [@Hermitian](https://boards.straightdope.com/u/Hermitian)\ **Post date:** [January 18, 2013, 6:18pm UTC](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555/10 "2013-01-18T18:18:57Z")
Depends on how you intend to “split” them. Geographically? Different business units? I know it is heresy not to hate on large banks on the Internet, but they do bring convenience/familiarity to customers in diverse locations. One thing I like about having a Bank of America account is that pretty much anywhere I move/travel in the continental US, there will be one nearby. If I used a smaller bank, this would not be true. With online banking this is less of a necessity than it used to be, but is still a convenience. ---
**Author:** ![hogarth](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/hogarth/32/1773_2.png) [@hogarth](https://boards.straightdope.com/u/hogarth)\ **Post date:** [January 18, 2013, 6:20pm UTC](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555/11 "2013-01-18T18:20:57Z")
You’d probably just end up with Goldman Sachs becoming Goldman Sachs (U.K.) with Goldman Sachs (U.S.) being a partially or wholly owned subsidiary (depending on how you worded your regulations). ---
**Author:** ![iiandyiiii](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/iiandyiiii/32/7924_2.png) [@iiandyiiii](https://boards.straightdope.com/u/iiandyiiii)\ **Post date:** [January 18, 2013, 6:58pm UTC](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555/12 "2013-01-18T18:58:04Z")
> [@Hermitian](#): > > Depends on how you intend to “split” them. Geographically? Different business units? For the sake of this discussion, my proposed plan will mandate that if a bank reaches that level, the bank has, say, 6 months to come up with and execute a split on their own terms, and if they don’t make the deadline, then the Consumer Protection Agency (or some other government organization) makes the plan for them. When first implemented, the plan would give a larger grace period for the existing megabanks to split. ---
**Author:** ![iiandyiiii](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/iiandyiiii/32/7924_2.png) [@iiandyiiii](https://boards.straightdope.com/u/iiandyiiii)\ **Post date:** [January 18, 2013, 7:01pm UTC](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555/13 "2013-01-18T19:01:11Z")
> [@hogarth](#): > > You’d probably just end up with Goldman Sachs becoming Goldman Sachs (U.K.) with Goldman Sachs (U.S.) being a partially or wholly owned subsidiary (depending on how you worded your regulations). Let’s say the regulations are worded such that this is not allowed- so there would be an upper limit of total assets that a financial organization must be below in order to operate in the country. I suppose there could be ties between the newly split banks (and I don’t know enough to expand on this) but one could not own the other. ---
**Author:** ![Dick\_Dastardly](https://avatars.discourse-cdn.com/v4/letter/d/c4cdca/32.png) [@Dick\_Dastardly](https://boards.straightdope.com/u/Dick_Dastardly)\ **Post date:** [January 23, 2013, 5:11am UTC](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555/14 "2013-01-23T05:11:51Z")
The Wall Street Journal today : - Pension funds across the U.S. are desperate to overcome low interest rates and churn out returns big enough to pay future retirees. Now some hedge funds and money managers are pitching something they see as a Holy Grail: a strategy that often uses leverage to boost returns of bonds that usually occupy the low-risk, low-return portion of pension-fund investment portfolios.\* This sounds good. And in the last five years these guys have proved that they know how to manage risk and being highly-leveraged. What could go wrong? \* ``` Money managers such as Bridgewater Associates, the world's largest hedge-fund firm, and a growing number of pension funds say this type of leverage is different. By using leverage through derivatives, such as bond futures, and by investing in commodities, some pension funds believe they can reduce their typically large exposure to the turbulent stock market and still earn solid returns. Other proponents of this strategy, known as "risk parity," include AQR Capital Management and Clifton Group, a Minneapolis-based investment firm. ....Pension officials that employ risk parity say they are using a modest amount of leverage, and nowhere near what investment banks used leading up to the crisis. They also are trading in large, liquid markets, and say they have ample liquidity should they ever need to settle trading losses with cash...."Ironically, by increasing your risk in the bonds you are going to lower your risk in your overall portfolio,'' he said in an interview. ``` - There you go, it’s just a little bit of leverage. And it’s done by using derivatives, which is a totally safe way to lever up your debt:assets ratio. Nothing to worry about. Trading is in large, liquid markets and stocks and bonds always move in opposite directions. All that’s missing is some way to blame this on Jimmy Cater or Fannie and Freddie when the inevitable happens. I’m sure somebody at the heritage Foundation or AEI or one of those places will find a way though. Lastly, good to see that the federal jackboot of regulation that is Dodd-Frank hasn’t stopped shit like this from happening. ---
**Author:** ![BrokenBriton](https://avatars.discourse-cdn.com/v4/letter/b/4bbf92/32.png) [@BrokenBriton](https://boards.straightdope.com/u/BrokenBriton)\ **Post date:** [January 23, 2013, 11:01am UTC](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555/15 "2013-01-23T11:01:09Z")
> [@iiandyiiii](#): > > Have any politicians put forward this kind of plan? If not, is it because the big banks have so much power and influence and don’t want that power and influence to wane? You heard of Glass–Steagall and good ol’ Billy Clinton’s repeal? ---
**Author:** ![Gyrate](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/gyrate/32/3588_2.png) [@Gyrate](https://boards.straightdope.com/u/Gyrate)\ **Post date:** [January 23, 2013, 1:07pm UTC](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555/16 "2013-01-23T13:07:28Z")
Subprime mortgages are coming back too. It’s money on the table, even if it’s money laced with anthrax. ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [January 23, 2013, 7:20pm UTC](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555/17 "2013-01-23T19:20:27Z")
> [@Dick\_Dastardly](#): > > The Wall Street Journal today : > > …This sounds good. And in the last five years these guys have proved that they know how to manage risk and being highly-leveraged. What could go wrong? > \* > > By using leverage through derivatives, such as bond futures, and by investing in commodities, some pension funds believe they can reduce their typically large exposure to the turbulent stock market and still earn solid returns. Other proponents of this strategy, known as “risk parity,” include AQR Capital Management and Clifton Group, a Minneapolis-based investment firm. > …Pension officials that employ risk parity say they are using a modest amount of leverage, and nowhere near what investment banks used leading up to the crisis. They also are trading in large, liquid markets, and say they have ample liquidity should they ever need to settle trading losses with cash…"Ironically, by increasing your risk in the bonds you are going to lower your risk in your overall portfolio,‘’ he said in an interview. > \* > > There you go, it’s just a little bit of leverage. And it’s done by using derivatives, which is a totally safe way to lever up your debt:assets ratio. Nothing to worry about. Trading is in large, liquid markets and stocks and bonds always move in opposite directions. > > All that’s missing is some way to blame this on Jimmy Cater or Fannie and Freddie when the inevitable happens. I’m sure somebody at the heritage Foundation or AEI or one of those places will find a way though. > > Lastly, good to see that the federal jackboot of regulation that is Dodd-Frank hasn’t stopped shit like this from happening. TANSTAAFL doesn’t always apply to all situations but it almost always applies to pricing of financial instruments. They are either increasing their risk or reducing their returns. The markets are too efficient to allow higher returns without increase in risk. These guys are just saying that they now have so many different types of risk that they offset each other. They are either lying or stupid. My guess is that the bankers are lying and the pension managers are by and large stupid. > [@Gyrate](#): > > Subprime mortgages are coming back too. It’s money on the table, even if it’s money laced with anthrax. I never had a problem with subprime mortgages, it was the non CRA subprimes that were the problem. ---
**Author:** ![colonial](https://avatars.discourse-cdn.com/v4/letter/c/34f0e0/32.png) [@colonial](https://boards.straightdope.com/u/colonial)\ **Post date:** [January 23, 2013, 7:55pm UTC](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555/18 "2013-01-23T19:55:06Z")
> [@BrokenBriton](#): > > You heard of Glass–Steagall and good ol’ Billy Clinton’s repeal? Reintroducing Glass-Steagall has struck me as a necessary part of any step one of financial industry reform, or perhaps counterreformation would be the most appropriate term. However, G-S underwent decades of gradual evisceration with both parties contributing to what was ultimately a rare display of bipartisanship. Thanks assholes. ---
**Author:** ![Elixson](https://avatars.discourse-cdn.com/v4/letter/e/a4c791/32.png) [@Elixson](https://boards.straightdope.com/u/Elixson)\ **Post date:** [January 24, 2013, 7:15am UTC](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555/19 "2013-01-24T07:15:58Z")
You had your chance to not just “split-up” some big banks but to sweep the remains of some of them into the dustbin in 2008 and it was missed when both parties propped them up. Their assets and liabilities could have been divided and sold to other banks as is already done with small banks. The idea that Glass-Steagall is a solution to anything makes no sense in a system wherein big business and the state are so closely entwined. The lack of Glass-Steagall (or bank regulation in general) did not cause the panic of 2008. state credit inflating the housing market did. ---
**Author:** ![zoid](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/zoid/32/336_2.png) [@zoid](https://boards.straightdope.com/u/zoid)\ **Post date:** [January 24, 2013, 8:00am UTC](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555/20 "2013-01-24T08:00:31Z")
> [@iiandyiiii](#): > > For the sake of this discussion, my proposed plan will mandate that if a bank reaches that level, the bank has, say, 6 months to come up with and execute a split on their own terms, and if they don’t make the deadline, then the Consumer Protection Agency (or some other government organization) makes the plan for them. > > When first implemented, the plan would give a larger grace period for the existing megabanks to split. 6 months is a near impossibility. Even if they could come up with a plan, just the need to obtain seperate systems for accounting HR and everything else would take WAY more than six months. Then you’d have to figure out which employees go to which company, how many more people your gonna need since you now have 2 HR departments etc., you gotta hire qualified people and train them, and on, and on… Could take years for a large organization to complete the entire conversion. [Next page](https://boards.straightdope.com/t/what-would-be-the-downside-of-splitting-up-the-big-banks/647555.md?page=2)