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Today in "Too Big To Fail": More Shrinkage Momentum

Very interesting development on the "too big to fail" front today: The Journal reports that Colorado Rep. Ed Perlmutter is planning an amendment to the systemic risk bill currently before the House Financial Services committee. The amendment would partly revive certain New Deal-era restrictions on banks: 

Rep. Ed Perlmutter (D., Colo.) is working on a separate amendment that would allow bank regulators to impose restrictions prohibiting certain companies from operating both a commercial bank and an investment bank if capital reserves fall below a certain level. "You've got to be able to make sure that the very speculative parts of the financial community can be separated from those parts that have to run every day and are not exciting," he said.

This comes on top of a proposed amendment by Pennsylvania Rep. Kanjorski to empower regulators to break up overgrown banks, which I discussed last week. But what's so interesting about the Perlmutter amendment is less the idea itself than the identity of its author: Perlmutter is a member of the House New Democrat Coalition, the pro-business group that was active in pushing back against the furthest-reaching portion of the recent derivatives bill. If the New Democrats are on board with breaking up certain big financial firms (and so far it only seems to be Perlmutter), it's going to be very hard for the banks to stop this kind of thing from passing the House. (According to the Journal, committee chairman Barney Frank supports these ideas.)

Of course, that doesn't necessarily mean it'll become law--far from it. The administration opposes the break-'em-up approach, and the Senate will obviously weigh in, too. But it's still very good news. Why? Because the administration's alternative to breaking up too-big-to-fail banks is to raise their capital requirements significantly, as a kind of tax on bigness. (I support this, too--I think we should raise capital requirements and break up he biggest firms.) But there are capital requirements and there are capital requirements, and the banks will obviously press for the most modest approach.  

Against this backdrop, the appearance of some credible break-'em-up ideas shifts the whole debate in a more hawkish direction. Even if the  hawkish ideas eventually die, as I suspect they will, the banks will have to concede something significant on capital requirements in order to fend them off. So we're likely to end up with a much tougher regulatory regime than we otherwise would have. As with health care, you can't overstate the importance of a vocal, activist left flank in keeping the policymaking process honest.