Too-Big-To-Fail Banking Entrenched by Regulations


A report released today by the Competitive Enterprise Institute finds that regulators are standing in the way of much-needed competition in the banking industry. That puts consumers and taxpayers at risk, because lack of competition in banking furthers the very Too-Big-to-Fail rationale that led to past bank bailouts.

“Uber is shaking up transportation, Airbnb is turning upside down the lodging industry, but in financial services, regulators are essentially hanging a sign outside their windows stating, ‘No new banks need apply,’” said John Berlau, CEI senior fellow and author of the report.

In the five years since enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010, regulators have approved only one new bank. Before 2010, by contrast, the Federal Deposit Insurance Corporation approved an average of 170 new banks per year.

“This lack of new bank competitors is one important reason why a large bank failure could severely curtail the supply of credit and availability of financial services,” said Berlau. “That in turn sets the stage for a continuing cycle of bailouts.”

Noting that Too Big to Fail banks are more entrenched than ever, Berlau blames Dodd-Frank as well as pre-Obama regulations that “artificially keep banks too big by encouraging mergers, preventing new banks from opening, and preventing the formation of new, innovative banking arrangements.”

Reforms put forward in the report include:

  • Congress should put procedures in place for approving new banks, in which regulatory agencies would have a specified time limit to approve or deny new bank applications.
  • Regulatory agencies should be required to give Congress and the public detailed explanations when those deadlines are missed.
  • Congress should repeal the Bank Holding Company Acts of 1956 and 1970 that put outdated and harmful restrictions on the separation of banking and commerce. Lifting that restriction would allow companies such as WalMart, Ford, John Deere, Catepillar, and others to provide banking services.
  • Congress should repeal provisions of Dodd-Frank, such as the Volcker Rule, that force Main Street banks to sell off financial instruments they use to hedge the risks of everyday activities, like lending.

> View the report