CLE Materials for Panel #1 - George Washington University Law ...

WILMARTH
4/1/2011 1:11 PM
2011] The Dodd-Frank Act 1057
“closely related” to banking and (2) mandate a “narrow bank”
structure for banks owned by financial conglomerates. In turn, the
narrow bank structure would (1) insulate narrow banks and the DIF
from the risks of capital markets activities conducted by nonbank
affiliates and (2) prevent narrow banks from transferring the benefits
of their low-cost funding and other safety net subsidies to nonbank
affiliates.
In combination, my proposed reforms would strip away many of
the artificial funding advantages that are currently exploited by LCFIs
and would subject them to the same type of market discipline that
investors have applied to commercial and industrial conglomerates
over the past thirty years. Financial conglomerates have never
demonstrated that they can provide beneficial services to their
customers and attractive returns to their investors without relying on
safety net subsidies during good times and massive taxpayer-funded
bailouts during crises. 458 It is long past time for LCFIs to prove—
based on a true market test—that their claimed synergies and their
supposedly superior business models are real and not mythical. 459 If,
as I suspect, LCFIs cannot produce favorable returns when they are
deprived of their current subsidies and TBTF status, market forces
should compel them to break up voluntarily.
458 See Wilmarth, supra note 6, at 748–49.
459 See JOHNSON &KWAK, supra note 137, at 212–13 (contending that “[t]here is little
evidence that large banks gain economies of scale above a very low size threshold” and
questioning the existence of favorable economies of scope for LCFIs); STIGLITZ, supra
note 453, at 166 (“The much-vaunted synergies of bringing together various parts of the
financial industry have been a phantasm; more apparent are the managerial failures and the
conflicts of interest.”).