MYTH: Breaking up banks is the only way to deal with “Too Big to Fail.”

August 24, 2012 • The Partnership for a Secure Financial Future

FACT:  Current regulations that focus on capital, liquidity and transparency have addressed “Too Big to Fail.”

Ultimately, the debate over bank size develops into a discussion of bank safety and taxpayers’ exposure to the financial services industry’s level of risk. Dodd-Frank and Basel III already enacted new regulations that address “Too Big to Fail” concerns.

Banks have increased capital levels significantly since the financial crisis to improve their safety and meet these new regulations. Since the financial crisis, all U.S. commercial banks have grown their capital dramatically to improve industry safety and soundness. As of Q2 2012, U.S. bank capital ratios stood at an all-time high of 12.76 percent.1

Additionally, Basel III regulations require big banks to raise even more equity to buffer themselves against potential future losses. For instance, the top four U.S. banks have increased their common equity, the best form of capital, to record highs.

Also, banks have significantly increased their liquidity to handle short-term funding challenges. Similar to capital levels, Basel III imposes stricter liquidity regulations on big banks as well.

Regulators have new tools to deal with banks that fail in the future. The FDIC’s new Resolution Authority gives them the tools to wind down large financial institutions. Moreover, big banks are required to complete regular stress tests and provide “living wills” that detail how they can be broken up and sold in the midst of a crisis. These new reforms provide regulators with the information and tools needed to deal with large banks in crises.

Ultimately, these new regulations and banks’ improved safety and soundness will enable markets to decide the proper size of banks.

1 SNL Financial, FDIC