How Big Banks Can Cure Break-'Em-Up Fever

The industry's two biggest problems — its lousy image and the intractable "too big to fail" issue — are linked.

Simply put, bankers' reputations ranks just above the tobacco industry's these days because too few believe the Dodd-Frank Act put an end to bailouts of large institutions.

So rather than debating whether the 2010 reform law did or didn't resolve "too big to fail," bank executives ought to move on to the next question: How can the industry convince the public that it doesn't want a handout when one of its biggest players gets into trouble?

The simple answer is to support repeal of Title II, the provisions in Dodd-Frank that lay out how a large financial company would be resolved. No special treatment; let these companies go into bankruptcy.

The House has passed legislation repealing Title II several times already.

Advocating a repeal of Title II could quiet critics who don't believe Dodd-Frank ended big-bank bailouts. It also could drain enthusiasm for breaking up the largest banks, which in case you hadn't noticed caught fire after the Attorney General branded large banks as Too Big to Prosecute.

(Why Eric Holder has not yet walked those statements back is a mystery, considering everything he said runs counters to the Obama administration's position. But that's another story.)

It's not that Title II won't work. I actually think it's one of the most effective parts of Dodd-Frank.

It's that too many people don't believe (or don't want to believe) that it will work.

I am not advocating the industry actively lobby to repeal these provisions. What I am suggesting is more passive. If critics think Title II enables more bailouts, then the industry should not fight to keep it.

This is not news: The TBTF debate is about politics, not policy. And while that's disappointing, it's also reality. Sending yet another CEO out to argue in public that Title II can work — it was Wells Fargo CEO John Stump's turn last week — is not the answer.

The industry clearly needs a new game plan if it wants to curb break-'em-up fever.

If the industry said it didn't need Title II and bankruptcy would suffice, then critics would have to stop blaming banks for the fact that they think Dodd-Frank perpetuates bailouts.

There is an alternative path, of course. Bankers and the FDIC could actually put the living wills mandated by Dodd-Frank into action. The first versions of these blueprints, showing how a large bank that got into trouble could be resolved, were filed by all the big banks last summer.

What's happened since then? Zip.

Perhaps the public would have more faith in Dodd-Frank if regulators required substantive changes of the largest banks based on their living wills.

If bankers are serious about improving their image, they should also get behind Richard Cordray's nomination to head the Consumer Financial Protection Bureau.

They should drop demands that the agency be run by a commission, that its budget be approved by Congress or that other regulators have an easier time vetoing its decisions. Just clear the way for Cordray and the CFPB to do their job. Sure, Senate Republicans may still stand in the way, but let them do it without the industry's support.

This would solve another of the industry's concerns — uncertainty.

Many bankers say their jobs are made more difficult by the lack of clarity in Washington. The first thing they point to is the budget mess, of course, but many also cite the confusion over the CFPB.

The legality of Cordray's recess appointment is unlikely to be cleared up until the fall and if his appointment is invalidated, and all the rules he's promulgated are overturned, that will not be good for bankers worried about uncertainty.

Supporting Cordray's nomination, which the Senate Banking Committee approved on Tuesday, would be a smart move.

The industry cannot keep absorbing body blows like Sen. Levin's devastating report last week on JPMorgan without responding. Bankers can't just talk about "doing the right thing" and hope everything will work out. It won't.

Today's path leads to oppressive oversight, activity restrictions and prescriptive rules that wring revenues and anger customers.

It's time for bankers to wake up and go beyond — far beyond — what they think is necessary to set things right.

Barb Rehm is American Banker's editor at large. She welcomes feedback to her column at Barbara.Rehm@SourceMedia.com. Follow her on Twitter at @barbrehm.