Yes, Bernie Sanders Knows Something About Breaking Up Banks

Bernie Sanders probably knows more about breaking up banks than his critics give him credit for.

The Daily News on Monday published an interview with him that led some commentators to say he didn’t know how to break up the country’s biggest banks. Downsizing the largest financial institutions is one of Mr. Sanders’s signature policies, so it would indeed raise questions about his candidacy if he had little idea of how to do it.

In the interview, with The Daily News’s editorial board, Mr. Sanders does appear to get tangled up in some details and lacks clarity. Breaking up the banks would involve arcane and complex regulatory moves that can trip up any banking policy wonk, let alone a presidential candidate. But, taken as a whole, Mr. Sanders’s answers seem to make sense. Crucially, his answers mostly track with a reasonably straightforward breakup plan that he introduced to Congress last year.

Here are the most relevant parts of the exchange.

Daily News: Now, switching to the financial sector, to Wall Street. Speaking broadly, you said that within the first 100 days of your administration you’d be drawing up…your Treasury Department would be drawing up a too-big-to-fail list. Would you expect that that’s essentially the list that already exists under Dodd-Frank? Under the Financial Stability Oversight Council?

The Daily News may be referring here to the contents of Mr. Sanders’s bill. The legislation says that, in no more than 90 days, the Financial Stability Oversight Council, a high-level regulator set up by the Dodd-Frank Act of 2010, would have to draw up a list of firms that appear to too big to fail. Then steps would be taken to break them up.

The Daily News comes back to the mechanics of breaking up the banks.

Daily News: Okay. Well, let’s assume that you’re correct on that point. How do you go about doing it?

Mr. Sanders: How you go about doing it is having legislation passed, or giving the authority to the secretary of Treasury to determine, under Dodd-Frank, that these banks are a danger to the economy over the problem of too-big-to-fail.

Mr. Sanders’s recognition here of the need for legislation is significant. Many banking experts say that Congress would need to pass a new law to give regulators the explicit authority to introduce direct caps on bank size. The Federal Reserve has introduced many measures since the financial crisis of 2008 that have created incentives for banks to shrink — and many banks are declining in size.

But senior officials at the Fed believe that Congress would need to do more. Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, favors extra measures to tackle too-big-to-fail banks and is working on a plan to do this. “Ultimately Congress must decide whether such a transformational restructuring of our financial system is justified in order to mitigate the ongoing risks posed by large banks,” Mr. Kashkari said in a recent speech.

The problematic word for Mr. Sanders in his answer above is “or.”

It suggests he believes that the secretary of the Treasury, using powers already given under Dodd-Frank, can press the banks to break up even without new legislation. This might be an option he’d take if Congress refused to pass new breakup legislation. Under Dodd-Frank, the Fed could in theory raise its capital requirements to such a high level for the largest banks that they quickly decide to break themselves up. But such a path might face stiff legal resistance. As a result, Mr. Sanders’s apparent suggestion that the Treasury secretary could act unilaterally might betray a weak grasp of Dodd-Frank. Or he may simply be confused about what it contains.

Daily News: But do you think that the Fed, now, has that authority?

Sanders: Well, I don’t know if the Fed has it. But I think the administration can have it.

It makes sense for Mr. Sanders to hedge here about the Fed. The Daily News asks if the Fed has that power “now.” As we have seen, the Fed currently has a lot of power but maybe not all the power it might require to break up the banks without facing serious legal challenges from the financial industry. And Mr. Sanders is also correct that an administration can obtain that power — that is what his bill is for.

Daily News: Well, it does depend on how you do it, I believe. And, I’m a little bit confused because just a few minutes ago you said the U.S. President would have authority to order…

Sanders: No, I did not say we would order. I did not say that we would order. The President is not a dictator.

Daily News: Okay. You would then leave it to JPMorgan Chase or the others to figure out how to break it, themselves up. I’m not quite…

Sanders: You would determine is that, if a bank is too big to fail, it is too big to exist. And then you have the secretary of Treasury and some people who know a lot about this, making that determination. If the determination is that Goldman Sachs or JPMorgan Chase is too big to fail, yes, they will be broken up.

Mr. Sanders is mostly cogent here. This is more or less how a breakup would work under his legislation. Doing what he outlines here would be far easier if Congress passed his breakup bill, or something like it. Mr. Sanders is on shaky ground if he thinks it would be easy to slash the size of the banks with Dodd-Frank alone. But, taking the interview as a whole, as well as his past positions, that does not appear to be the path he favors.

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