In Europe, plans to break up banks in the United Kingdom to limit risk and promote competition were approved. But what about the United States? Isn’t this the place where all the financial turmoil started in the first place?
Thomas Hoenig, president of the Kansas City and Fed Richard Fisher, president of the Dallas Fed think so. These are two prominent members of the federal reserve system that think the “Too big to fail” banks should be broken up in the United States. These corporations receive an unfair government subsidy. Furthermore, an international agreement must be reached to allow loans to be given by banks not on American soil and to break up large too big to fail banks that pose a risk to the entire industry if one fails.
During the great recessions, one thing is sure.. Banks are what hampers recovery. Alternatively, during the severe downturns (including the Great Depression), when many small banks don’t have enough capital to make loans the government could theoreticly use their power to force the big banks to make loans and provide capital–but has that worked now?
If banks are broken up and they become more competitive between one another they will have more incentive to make loans and insolvent banks could simply go bankrupt without having to spend billions of taxpayer money. The toxic assets disappear without having to prop of a huge company that uses these risky investments for a significant portion of their profit, like AIG.