One of the most common talking points from Senator Bernie Sanders is his plan to break up big banks, recently outlined in his “Too Big to Fail, Too Big to Exist Act” [11], which he submitted for Congressional consideration on May 6th [12]. Presidential candidates Martin O’Malley and Hillary Clinton released similar plans on July 6th [13] and October 8th [14], respectively. Sanders argues that these institutions pose a huge risk to national and world economic stability and harm the middle and lower classes [15]. However, defenders of the free market argue that breaking up big banks would increase banking costs for consumers and destabilize the U.S. economy.

Recently, mainstream Democrats have come to accept a view that the federal government has the responsibility to break up so-called “big banks”. This issue, however, is incredibly complex and involves at least two different ways of “breaking up” such banks. There is the call to reinstate Glass-Steagall, which would force any bank that currently has a commercial banking and investment banking arm to separate those two entities, and then there is breaking up too-big-to-fail banks, which means breaking up banks that are so big that they pose a systemic risk to the entire economy.

The first argument Mr. Wong makes is that banks need size in order to increase efficiency, essentially arguing that banks experience a scale economy. While this might be true for banks over $1 billion dollars as Mr. Wong states, this is highly disingenuous. According to a study conducted by Colorado College of 1,200 banking institutions, there is actually a diseconomy of scale as banks get larger. What this means is that the current big banks, worth upwards of $200 billion dollars and dealing with assets in the trillions of dollars, are not experiencing any increased efficiency operating at this enormous size.

While Mr. Wong argues that banks have an interest in protecting each other from collapse, he fails to see the problem at hand. Big banks continually fall into trouble and it takes taxpayer money to bail out the systemic harm caused by just one of these banks collapsing, such as Lehman brothers and Bear Sterns in 2008. Where was the financial industry then? I’ll tell you where: taking huge sums of taxpayer dollars to pay their CEOs some of the largest bonuses ever experienced by Wall Street. Even if they bail each other out, the value of main streets assets should not have to continually face massive business cycles because of the greed of large institutions that have no business operating with this much risk involved.

Lastly, Mr. Wong claims it is too difficult to break up big banks. Even if he is right, does this mean we should not do it? If the fate of our economy is at stake here, why would we not make the hard decision. If we made every decision based on the difficulty of action, where would we be as a nation? The interesting part is this is not as difficult as my opponent speculates. Big banks are not monolithic entities; they are simply a collection of different services. Banks often spin off divisions all the time. This would simply be a mandatory spin-off of some operations that can easily exist separate from the rest. For example, the investment banking operations could be split into a company for equity underwriting, a company for debt capital markets, and a company for mergers and acquisitions. Big banks are just conglomerates of other banking activities. Breaking them up is even easier than putting them together. 

Mr. Raguz argues that Glass-Steagall should be reinstated because it will protect depositors at commercial banks from losing their money if the associated investment bank fails. Indeed, if this were the case, I would be the first person to call for reinstatement. However, such an argument overlooks the broad securities already in place for depositors. This security comes from the Federal Deposit Insurance Corporation (FDIC), a government agency established by the Banking Act of 1933. This Act is also known as Glass-Steagall [20]. The FDIC insures up to 250,000 dollars for every depositor in every approved bank in the United States. Since its inception in 1933, no investor has lost a single penny from an insured account due to a bank failure [21]. The argument that Glass-Steagall is needed to protect depositors is without merit and needlessly propagates fear.

Mr. Raguz’s second argument is stronger. Moral hazard is a significant problem facing the banking and regulation industries and was exacerbated by the 2008 crisis. However, breaking up big banks is not the best way to solve this issue. Synthetically fracturing banks could have far-reaching economic consequences. Big banks rely on scale economies to increase efficiency, improve returns, and decrease costs for customers. Government interference in this field could destroy these advantages and have long-term effects on the U.S. economy.