Should the Megabanks Be Broken Up?

The debate over breaking up the too-big-to-fail (TBTF) banks has been going on for awhile. A recent opinion piece by George Will in the Washington Post makes the case once again why it's "Time to break up the big banks". Thanks to DA member cumulus who posted on this in the forum.

The article mentioned an interesting fact about the four biggest U.S. banks (JPMorgan Chase, Bank of America, Citigroup and Wells Fargo). In 2011, they held 40 percent of all federally insured deposits. As the article mentioned, "there is a silent subsidy - an unfair competitive advantage relative to community banks - inherent in being deemed by the government, implicitly but clearly, too big to fail."

The megabank deposits continue to grow as their deposit rates sink. You have to wonder how much of this deposit growth is due to their TBTF status. Depositors are more willing to accept low rates when they don't have to worry about the safety of their money. This is especially the case for large deposits that go over the FDIC insurance limits.

To confirm the deposit growth, I reviewed the 2012 Q4 earnings reports of the four megabanks. Below are excerpts from the reports:

• Chase: "Consumer & Business Banking average deposits up 10%" (source)
• Citibank: "Citigroup Deposits of $931 Billion Grew 7% Versus Prior Year Period" (source)
• Wells Fargo: "Total average core checking and savings deposits up $72.0 billion from fourth quarter 2011" (source)
• Bank of America: "Total Average Deposit Balances up $28 Billion, or 11 Percent (Annualized) From Prior Quarter" (source)

I also took a look at their deposit rates. Here are their 12-month CD rates of the four megabanks as of 2/11/2013. Note, rates may vary based on location:

• Chase: 0.25% (special)
• Citibank: 0.20%
• Wells Fargo: 0.05%
• Bank of America: 0.25% Featured CD with Platinum rate

As you can see, even the special CD rates are low. As a comparison for 1-year CD rates, you can get 1.25% APY at PenFed and 1.05% APY at Nationwide Bank (and several other internet banks).

Attempts to Downsize the Megabanks

There have been attempts in Congress to downside the megabanks. George Will's column mentions Senator Sherrod Brown's SAFE Banking Act and links to this article from Senator Brown. Here's an excerpt summarizing the Act:

It would prevent any one bank from controlling more than 10 percent of federally insured deposits or assuming more than 10 percent of the U.S. financial sector’s liability. Under the bill, no bank could grow to more than 2 percent of the nation’s gross domestic product – with these limits reevaluated as the economy grows.

In 2010, the SAFE Banking Act was voted down on the Senate floor by a vote of 61 to 33. It was opposed by the White House and by most Republicans. According to Senator Brown:

Not only did Treasury oppose it, but they proudly opposed it. If the Treasury had spoken out for it we could have gotten very close to winning.

Last year, Senator Brown reintroduced the SAFE Banking Act. We'll see if the Treasury Department with a new Secretary will be more receptive. With strong opposition from Wall Street, it seems unlikely.

Poll: Should the Big Banks Be Broken Up?

I haven't seen the arguments from the Treasury against breaking up the big banks. I've heard some argue that it would put the large U.S. banks at a disadvantage to the foreign big banks. There sure seems a lot more reasons to support the break-up. So this poll may be one-sided. Perhaps, some readers will have reasons to be against a break-up of the big banks.