Breaking Up the Big Banks: What You Need to Know

Last week, President Donald Trump said he was considering breaking up the big Wall Street banks–sending the whole financial industry into a frenzy.

Since taking office, Trump has taken actions to roll back many of the Dodd-Frank regulations implemented during the financial crisis. Those types of actions put Wall Street at ease—so the idea that he’d consider breaking up the big banks was startling to many in the industry.

While it’s not clear whether any immediate action will happen, several members of the Trump administration have expressed support for regulations along these lines.

So, what’s all the commotion about big banks, and what impact would a breakup have on small business? Here’s what you need to know.

Why break up the big banks?

Banks like JPMorgan Chase, Bank of America, and Wells Fargo provide crucial services to millions of customers all over the country. So why break them up?

As with any controversial policy question, there are plenty of good reasons for and against breaking up the big banks.

The most basic reason to break up the banks is to increase the stability and security of our financial system. Average American consumers and business owners keep their deposits in commercial banks—but in addition to holding deposits, those banks also have divisions that invest in global markets. That exposes banks (and the deposits they hold) to risks in the broader economy.

You’ve probably heard that some banks are “too big to fail.” That just means these banks are so large and interconnected that their failure would send a ripple effect throughout the entire economy. In the event that the bank’s investments don’t pan out, the government would have to bail them out to protect against widespread economic consequences.

That might sound comforting, but there’s a catch—those bailouts would be funded using tax dollars, so it’d trade off with programs that could be beneficial for small business owners.

So, those who don’t want to treat these banks as “too big to fail” might support breaking up the banks as a solution. Breaking them up would force the banks to downsize, minimizing the risk they pose to the larger economy.

How would we go about breaking up the banks?

It’s tough to say what exactly the system would look like, but breaking up the big banks could take a number of different forms.

One way to break up the big banks would be to reinstate a version of the Glass-Steagall Act, a Depression-era law that would separate the commercial and investment banking arms of banks.

This would create more small commercial banks, which would hang onto your checking and savings accounts as separate entities from investment banks.

Last month, several U.S. senators in support of breaking up the big banks introduced a “21st Century Glass-Steagall Act” bill. That bill would separate traditional banks with savings and checking accounts from riskier financial institutions offering investment banking, insurance, and hedge fund and private equity activities.

No matter how a change is implemented, one thing is for sure: Breaking up the banks would decrease the size of the banks—and their risk of failure.

How would breaking up the banks impact your business?

The truth is, breaking up the big banks wouldn’t have an immediate, drastic effect on small business owners.

But over time, this policy could impact the economy in ways that would change things up for small businesses.

Here’s how.

The good: Breaking up the big banks would protect the financial system against shocks in the global economy—and that’s good news for your savings and checking accounts!

In other good news, deposits would be better protected from larger risk and volatility—meaning that your money would be less vulnerable during dips in the economy. And since less risk makes a bailout less likely to be necessary, your tax dollars would go to more beneficial government programs.

And if it’s done right, breaking up the big banks would create a lot of small ones. With increased competition among small banks for small business borrowers, small business owners could see a decrease in interest rates—and more affordable business loans are good for everyone.  

The bad: In order to implement these changes to the financial system, banks would have to incur a pretty big compliance cost.

But unfortunately, that cost could make them more conservative in their loan books—meaning that loans might be smaller and harder to qualify for.

That high compliance cost, combined with the fact that commercial banks could no longer subsidize their lending with earnings from their more profitable investing divisions, could spell trouble for small business lending.

Because banks still have to remain profitable, they’re less likely to underwrite smaller, less profitable loans when they have to pay a high compliance cost. And since the banks would be smaller in size, they’d no longer benefit from economies of scale—increasing their regulatory burden and making it more difficult to lend out money.

Looking Ahead Toward the Big Bank Breakup

When it comes to financial regulation, it’s not always easy to piece together how things will impact your business.

Trends and regulations in the economy might seem distant, but they can impact your financing options and, ultimately, your bottom line. It’s important to stay informed about how the banking system might change over time so that you can stay on top of the best financing options available to you.

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