Break Up the Banks Yourself

By Tim Fernholz

Arguments over what must be done to fix the financial sector after the crash of 2008 are still heated as we head into 2010, with lobbyists, consumer advocates, members of Congress, and the Obama administration scrapping over what kind of regulations will limit risk, prevent future bailouts, and ensure that banks are actually building the economy, not destroying it.

One of the big debates is whether the banks should be broken up; in the wake of the crisis, policies designed to save the system have left us with an extraordinary concentration of assets in a few major banks (though we are still more diversified than other developed nations). Having so few banks controlling so much money creates a large risk that, should the system suffer further shocks like increasing losses in the commercial real-estate market, these banks will be treated as "too big to fail" by the government, forcing another round of expensive bailouts.

The Democratic plan to solve this problem is still waiting for action in the Senate. The House of Representatives passed a bill modeled on the ideas of the Obama administration, which gives a regulatory council, led by the Federal Reserve, the power to slow a bank's growth and limit the businesses it can do (separating regular consumer banking from risky investment banking, for instance) and liquidate failing banks without bailing them out. But we're at least a year away from seeing that bill become law, and besides, populist critics say, when you give any discretion to an industry regulator, they're very unlikely to take action to prevent problems. Rules need to be hard and fast, and commercial banks simply shouldn't be allowed to take risks like investment banks.

But even if critics can get harder rules put in place—which seems unlikely thanks to the power of the financial-sector lobby, Republican objections to any kind of increased regulation, and the many moderate Democrats who remain sympathetic to financial interests—they still won't come into play for at least a year. What to do in the meantime?

Well, via Andrew Sullivan, there's a new idea being pushed by some progressive activists: individuals with accounts at banks like Citigroup or Bank of America should take their money and move it into a local bank or credit union, where they are likely to pay fewer fees and get better service. Call it the George Bailey strategy. While basing policy advice on a movie, however beloved, isn't a particularly compelling argument, the facts are also there to support such a move for consumers. Given the horror stories coming from big-bank customers of high fees and bad service, there is plenty of market incentive to switch. Credit unions, for instance, offer lower fees, longer grace periods, and competitive interest rates.

Aside from the personal benefits, this move makes sense for anyone uncomfortable with the bank bailouts (which is just about everyone) as a way to meaningfully express their views on public policy in their daily life. In the '60s, the political became personal. In the past decade, it has become financial.