Enforce Dodd-Frank: Break Up Bank of America

Enforce Dodd-Frank: Break Up Bank of America

Enforce Dodd-Frank: Break Up Bank of America

If there were a run on Bank of America, the financial system would once again be devastated—and the government needs to act now. 

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Section 121 of the Dodd-Frank financial reform bill provides a pretty clear mandate: if the federal government determines that a financial institution poses a “grave” risk to the financial system, the government is entitled to take action to mitigate that risk.

Specifically, if the Board of Governors of the Federal Reserve System makes that assessment, it can take action with the approval of the Financial Stability Oversight Council, which is part of the Treasury Department. The potential actions can range from limiting mergers and acquisitions, imposing conditions on how the institution does business or ordering it to liquidate.

When progressives criticized Dodd-Frank, they note that too-big-to-fail banks weren’t broken down, and that’s true—in fact, many of these banks are bigger now than they were before the financial crisis. But that doesn’t man Dodd-Frank didn’t offer some tools in that regard, and Section 121 is one of them.

To that end, Public Citizen filed a petition this week to the Federal Reserve and FSOC to break up Bank of America—a bank that’s clearly too big to fail, since it holds assets equal to one-seventh of the United States’ gross domestic product. It’s got the second-biggest holdings of any US bank and is interconnected with so many other institutions that few people—if any, even inside the bank—truly understand the complexity of those arrangements and dependencies.

But most importantly, Bank of America isn’t on terribly sound financial footing. Many consider it to be the least stable US bank, though there’s a wide variety of opinions on how bad the problem is. But if the market lost confidence in Bank of America, and there was a run on the bank’s stock, the consequences for the economy would be devastating in the truest sense of the word.

So Public Citizen’s petition urges the Federal Reserve and FSOC to take action now and break up the bank:

This petition does not urge a particular course. The petitioners are not privy to the full range of information available to financial regulators, which is likely necessary to form specific recommendations. But publicly available information is sufficient to show that financial regulators must take dramatic, assertive action to foreclose the possibility of catastrophic damage from Bank of America and fulfill the purposes of the Dodd-Frank Act. The regulators should be able to break up Bank of America into smaller institutions that would be less likely to fail and less dangerous in the event of failure—and for which orderly liquidation would be more likely to succeed should it become necessary. The time to use section 121 is well in advance of a crisis. In the case of Bank of America, that means now.

In the short term, the prospects for success here seem virtually nil. The Federal Reserve and FSOC have well-known affinities with the banking industry, to put it gently.

But in this age of financial meltdown, government bankruptcies and sudden financial chaos, a lot of things are impossible—until they suddenly aren’t. If, say, further revelations suggested Bank of America was truly in danger, this option would quickly become much more viable, and it’s crucial to have this route introduced into the discussion. And in a perfect world, the Federal Reserve would act now.

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