Banks: Too Big to Break Up?

After the Great Depression, Congress passed the Banking Act of 1933, which included banking reforms such as the Glass-Steagall Act (named for its Congressional sponsors, Senator Carter Glass (D) of Virginia and Representative Henry B. Steagall (D) of Alabama). That Act was designed to limit the activities and affiliations commercial banks could engage in with securities and securities firms. In 1999, those restrictions were repealed via the Gramm-Leach-Bliley Act under President Clinton.

And here we are today. Since the subprime mortgage crisis that launched the country into economic recession, debates abound regarding the wisdom of limiting the size and security-based risks in which banks are allowed to engage.

 

Jumping into the fray just recently is former Citibank CEO Sandy Weil, whose resume includes acquiring insurance companies, retail brokerages, and investment banks and merging them into the behemoth empire known as Citigroup. He claims to have been instrumental in lobbying for the repeal of the Glass-Steagall Act. To the surprise of the banking industry, Weil went on CNBC’s “Squawk Box” recently to call for the return of Glass-Steagall-like reforms:

 

“What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail.”

 

[CLICK HERE to watch video of Sandy Weill, “Wall Street Legend Sandy Weill: Break Up Big Banks,” at CNBC.com, July 25, 2012.]

 

[CLICK HERE to read the article, “Insight: Banks bristle at breakup call from Sandy Weill,” at Reuters, July 27, 2012.]

 

Good Service Isn’t Profitable
Since receiving bailout money from the federal government during the height of the “Great Recession,” banks have built up strong balance sheets and appear to be fully recovered. In fact, they appear to now be so strong that customer experience isn’t exactly a priority.

Time quotes an industry analyst who observed, “There’s no evidence in the US banking system that offering a labor-intensive personalized service is successful in terms of letting the banking institutions survive. It’s very costly with virtually no benefit.”

 

With the electronic age, technology enables banks to offer faster, more convenient – but less personal – service. And it saves them money, since ATM machines don’t take sick days, ask for raises, or need health insurance.

 

Electronic ties also make it difficult for customers to switch banks thanks to direct deposit, automatic draft payments, and elaborate bill pay systems. A new Consumer’s Union survey reveals that while nearly one in every five customers has considered changing banks in the last year, nearly half of them don’t because it’s too much trouble.

 

[CLICK HERE to read the article, “Uh Oh: Bad Customer Service Is Good For Bank,” at Time, July 26, 2012.]

 

[CLICK HERE to read the news release, “Survey Highlights Top Impediments to Switching and Reforms That Would Make Consumers More Likely To Move Their Money,” at ConsumersUnion.com, July 24, 2012.]

 

The progress of banks and their relationships to consumers, Wall Street and politicians will continue to rule headlines – at least until the economy has officially turned the corner. If you’d like to discuss how developments in this industry may impact your financial picture, please contact us.


The information and opinions contained herein are provided by third parties and have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by our firm. Content is provided for informational purposes only and is not a solicitation to buy or sell the products mentioned. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation.   

 

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