Former Federal Reserve Chairman, Paul Volcker, along with the head of Current Bank of England Governor, Mervyn King, are arguing that some of the nation’s largest banks, such as Bank of America (NYSE: BAC), Citibank (NYSE: C), Wells Fargo (NYSE: WFC), and others should be broken into smaller regional banks in order to prevent institutions from becoming too big to fail.
Both U.S. and British Governments have been unwilling to give up on the concept of the megabank that has brought together investment banking and commercial banking. Despite a strong effort from Volcker to sell the idea to the Obama administration, the U.S. government appears to be siding with the mega-banks.
Volcker has been involved in various hearings on Congressional hill and has met with Obama administration advisors. Volcker’s primary suggestion would involve some version of the Glas-Steagall Act, which would make it so that retail banks could only deal with traditional commercial banking and be prevented from engaging in higher-risk investment banking moves.
The current governor of the Bank of England seems to agree with Volcker’s assessments. Mervyn King, said that there were two ways for regulators to handle the issues regarding the financial meltdown that occurred last year.
In a recent speech, King stated “One is to accept that some institutions are ‘too important to fail’ and try to ensure that the probability of those institutions failing, and hence of the need for taxpayer support, is extremely low. The other is to find a way that institutions can fail without imposing unacceptable costs on the rest of society.”
King stated that in the first approach, banks would be forced to raise their capital buffer levels to prevent against failure, but King admitted that it would be “almost impossible to calculate how much contingent capital would be appropriate” for each institution. In the second approach, King said it would be tantamount to rejecting “the idea that some institutions should be allowed to become ‘too important to fail.’ “
Despite King’s efforts, the British government has followed their counterparts in the United States and has indicated to date that they are plan on keeping megabanks in-tact.
