The next president could be forced to break up big Wall Street banks, even if they don't want to

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The issue of breaking up the banks has been a major part of the Democratic presidential primary. Bernie Sanders is running on a platform that focuses heavily on breaking up the country's largest financial institutions, while Hillary Clinton has taken a more moderate tone, saying she would be willing to break up the banks, but only if their size posed a significant threat to the country’s financial stability. And Republicans don't support breaking up the banks at all.

But news this week from two major U.S. regulators suggests that several big banks may pose just such a threat, and the next president could be forced to take action to break up the banks, even if it's not part of his or her platform.

Under Dodd-Frank, the financial reform bill that was passed after the crash of 2008, eleven of the largest U.S. banks had to submit something called a “living will” that would essentially act as a blueprint for how the banks would be resolved (broken up) in the event of a crisis, so as not to do too much harm to the overall economy. The plans are evaluated by two regulatory bodies: the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve. If the regulators don’t think the plan is good enough to avoid harm to the economy, they can take a number of enforcement actions, including forcing the bank to basically break itself up.


In 2013, the first round of living wills was rejected, but the Fed and FDIC extended the deadline to give banks another shot. Now, the two regulators have just finished reviewing the latest round of living wills, and they found that 5 big banks—including JPMorgan Chase, Bank of America, and Wells Fargo—are essentially still too big to fail (the FDIC rejected two additional plans that the Fed accepted). Instead of taking enforcement action against these banks, regulators once again extended the deadline, this time to October 1.

If banks fail to meet that deadline, they will face some enforcement measures right away, and if problems persist for two years, they could be forced to start selling off assets—meaning that a new president would have to start overseeing the break-up of banks during his or her first term.

Republican frontrunner Donald Trump, as well as his closest rival Ted Cruz, have called for a complete repeal of the Dodd-Frank financial reform law. However, without a filibuster-proof majority, it is unlikely that either candidate would be able to push a full repeal through Congress. Trump or Cruz could, in theory, appoint regulators at the FDIC who would be lenient with the banks, but the Fed will remain under the direction of its chair Janet Yellen until at least 2018. That means that a President Trump or President Cruz could find themselves overseeing a break up of the big banks, even if they don't personally support the policy.

Hillary Clinton has said on multiple occasions that she thinks the government should use its power to break up the country’s biggest banks if their size poses a risk to U.S. financial system. She emphasized that position recently in an interview with the New York Daily News, saying, “I have said many times in debates and in other settings, there is authority in Dodd-Frank to break up banks that pose a grave threat to financial stability.”


After the Fed and the FDIC made their determinations public, Hillary Clinton issued a statement saying, in part, “I have made clear that a critical part of Dodd-Frank’s blueprint to rein in risk in the financial system is the living wills process, and it must be strongly enforced.” She went on to suggest that the Fed and the FDIC should take action against any bank that fails to re-submit a credible plan.

It is possible for the two regulators to extend the deadline again if the banks fail to meet their requirements. There are also some actions that regulators can take that would not require those banks to be broken up. (For instance, regulators could raise those banks’ capital requirements in order to absorb potential losses in the event of a crisis.)


But Hillary Clinton, along with several former Republican candidates like Jeb Bush and Rick Santorum, already believes that capital requirements are too low for the entire banking system. In other words, the only serious way to mitigate the risk that those banks pose to the economy would be to start breaking them up or limiting how they do business. And there's an outside chance that the next president's first term will include taking a big, dramatic step to break up the banks.

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