Is the Public Utility Holding Company Act a Model for Breaking Up the Banks That Are Too-Big-to-Fail?

Roberta S. Karmel

Volume 62, Issue 4, 821-864

During the financial crisis of 2007–08 and the debates on regulatory reform that followed, there was general agreement that the “too-big-to-fail” principle creates unacceptable moral hazard. Policy makers divided, however, on the solutions to this problem. Some argued that the banking behemoths in the United States should be broken up. Others argued that dismantling the big banks would be bad policy because these banks would not be able to compete with universal banks in the global capital markets, and in any event, breaking up the banks would be impossible as a practical matter. Therefore, better regulation was the right solution. This approach was generally followed in the financial reform legislation that was passed.

In the past, the United States has taken a variety of approaches to reining in banks. These include capital constraints, geographical restrictions, activities restrictions and conflict of interest restrictions. The primary techniques for reining in big banks recently enacted by Congress were increasing capital requirements, walling off proprietary trading and/or derivatives trading from commercial banking, and creating a resolution regime for failed financial institutions.

One approach that has not been tried or even seriously discussed with regard to the big banks is the approach that was used to break up the utility pyramids created during the 1920s, that is the antitrust approach utilized in the Public Utility Holding Company Act of 1935. This targeted and highly effective regulatory framework empowered the Securities and Exchange Commission to dismantle and simplify the corporate structures of the utilities without destroying them. This Article argues that this approach should be considered as a solution to the too-big-to-fail problem since it combines deconcentration, capital limits, activities restrictions and conflict of interest restrictions as an alternative to antitrust regulation, outside of adversarial prosecutorial case development.

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