Should we put a wall up between retail & investment banks? (S1709)

Summary of Congressional bill S 1709 (114th):

  • Separates commercial and investment banking into separate companies.
  • Commercial/retail banks handle general banking, like checking & savings accounts, loans, and CDs.
  • Investment banks handle higher-risk finances, like mergers & acquisitions, issuing stocks & bonds.

In Depth:

  • Given 5 years to complete the separation
  • Originally, was enacted in 1933; partially repealed in 1999.
  • The major point here is that commercial bank deposits are guaranteed by the government (FDIC).
    • So if investment banks are within commercial banks, then investment banks could use government guaranteed money for high-risk products.

Vote Yes if you believe:

  • This reduces the risk of financial crisis and the need for federal bailouts. #FederalBailout #FinancialCrisis #TooBigToFail
  • Increase the competition by creating more companies and smaller companies. #Competition #TooBigToFail
  • Makes investors, and not taxpayers, on the hook for bad investments. #FreeMarket
  • This diversified the concentration of economic power in the country. #Inequality

Vote No if you believe:

  • Consumers have a better banking experience when commercial banks and investment banks operate together. #ConsumerAccess
  • Financial crisis occurs because of bad investments, not because commercial and investment banks are together. #FreeMarket
  • Five years is too much time to wait for the banks to break up. #TooBigToFail link to S 1709

(This is the 1st draft of the summary for a bill in Polinav. Summary & In-Depth is non-partisan & Vote yes/no reasons are fact-checked. if you think something is wrong, should be added or deleted, comment below!)

Let’s put it out there, I support this bill. Once someone understands the basic mechanics of this bill, there’s no reason to not support it.

Here’s the crux of this issue. Retail banks are relatively safe, with one of the bigger fears being a lot of depositors rushing to get their deposits out when the economy sours. Hence why we have the FDIC. Up to $250,000 is guaranteed by the FDIC, so you don’t need to rush to get your money out. But this guarantee is where the problem is.

If commercial banks & investment banks are within the same corporate structure, investment banks are able to use some of the deposits to make their riskier bets. So they use cheap, guaranteed money to make bets on the market. When their bets collapse, as they did in the Great Recession, the depositors from the commercial side of the bank are exposed to that loss, which puts the government on the hook to pay out those deposits. The Volcker Rule was also related to this, but that is its own separate post.

The free market argument doesn’t work here because using government-guaranteed money breaks that free market principle. If they’re going to make these bets, the only people exposed to those losses should be the investors in that bank, not taxpayers. If taxpayers were party to the profits, maybe an argument could be made, but nope, taxpayers are only exposed to the losses.

I would want my representatives to vote YES on this bill!



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