Since the financial crisis of 2008 a lot of attention has focused on the role that “too big to fail” banks played in the crisis.
In fact, some of the key provisions of the Dodd-Frank reform measure, in particular the Volcker Rule, are aimed at addressing the too big to fail problem. But some observers argue that the reforms don’t go far enough and big bank model needs to be structured.
In the middle of this intellectual debate, one of the leading proponents of the “one-stop shopping” bank model, Sanford (Sandy) Weill says that investment banking should be split up from commercial banking.
This might have an ironic touch to it; as one of the leading advocates in the 1980s to repeal the Glass-Steagall Act in order to create firms that could compete with their rivals in Europe now says that the banking system needs to go back to the Glass-Steagall era.
In an interview that was broadcast earlier last week on CNBC’s “Squawk Box,” Weill said “what we should probably do is go and split up investment banking from banking.”
“Have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not going to be too big to fail.”
In other words he is calling for a return to Glass-Steagall the 1930s financial rule that separated commercial banking from investment banking in response to the market crash of 1929 and the so-called Great Depression that followed for the next decade.
Of course, the global capital markets have a need for large firms with sufficient capital reserves to tap the markets to ensure liquidity is accessible for the rest of the financial system. In the end this story bears watching as the debate will continue and has it is widely known, breaking up is hard to do.
