Dem lawmaker calls on regulators to get tougher on big banks

By Peter Schroeder - 12/13/12 02:27 PM ET

A Democratic Congressman is calling on financial regulators to use their newly expanded powers to break up the nation's largest banks — or at least make them more manageable.

Rep. Brad Miller (D-N.C.) sent a letter to top regulators at the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) Thursday, calling on them, two and a half years after the Dodd-Frank financial reform bill was signed into law, to get serious about dangers posed by ever-growing financial institutions. Miller is retiring from Congress at the end of the year.

"The uncertainties in the financial system may not allow for year after year of polite suggestions by regulators and modest tweaks by institutions," he wrote.

In particular, Miller called on regulators to use their new-found powers to require "living wills" of banks as a way to trim them down to a more manageable size. Under Dodd-Frank, large institutions are required to provide regulators with such documents, which detail how the firms could be safely wound down in an orderly fashion if they began to collapse. The idea behind the policy is to give regulators the ability to dissolve a single firm without endangering the entire financial system, in an attempt to avoid the broad bailouts that were common in the last financial crisis.

Miller contended that these wills should provide regulators with the ability to break up large banks into a safer size. However, he was not adamant that banks be required to shrink, although he said he wouldn't object to it either.

"I support a direct approach, but am willing to consider nuanced approaches," he wrote.

He also threw his support behind an idea put forward by Sheila Bair, the former head of the FDIC. Bair has suggested that large, complex firms could be reorganized in a way that allows each of its subsidiaries to function as a separately managed legal entity. That way, if a portion of a bank began to face trouble, its impact could be easily isolated from the rest of the firm, reducing the danger.

"I urge that you not assume that the next financial crisis is decades or perhaps generations away in exercising your living wills authority," said Miller. "I urge that you assume that the financial system faces an exigent threat, because it may."

Support for breaking up the nation's largest banks has not broken cleanly down partisan lines. Both Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.) have expressed support for the idea, as has Richard Fisher, president of the Federal Reserve Bank of Dallas. A common critique of Dodd-Frank among congressional Republicans is that it has failed to end the problem of "too big to fail" firms. However, many Republican lawmakers have argued that a strengthened bankruptcy regime is the proper course for addressing the issue, not splintering the biggest banks.

Many Dodd-Frank backers, including the White House, argue that the new law gives regulators the power to handle such massive firms, meaning that banks do not need to be broken up.