What does “breaking up the banks” mean?

After the recent drama about the 2015 spending bill in Congress, a lot of people are talking about the “disarray” amongst Democrats. I was particularly intrigued by what Greg Sargent wrote about that this week.

There is broad Democratic agreement that the party must come up with a more comprehensive response to stagnating wages and the failure of the recovery to achieve widespread, more equitable distribution. Dems mostly agree on a range of policy responses, such as a minimum wage hike, pay equity, expanded pre-K education, and big job-creating investments in infrastructure.

But there are clear divisions, too. Democrats like Warren, Sherrod Brown, and Bernie Sanders favor some form of breaking up big banks and back expanding Social Security; Sanders wants major reform to trade policies; and some Democrats oppose the big trade deals now being negotiated.

I’m going to leave Social Security and trade deals alone for today. That’s because I’d like to explore a bit about what various progressives mean when they talk about “breaking up the banks.”

First of all, it’s important to define what we mean by “banks.” The kind most of us are familiar with are commercial banks where we deposit our money into savings/checking accounts and occasionally take out a loan. But often when people talk about banks in this context, they’re talking about the much larger global financial investment firms (some of which house commercial banks) that are the heart of “too big to fail.”

Recently Sen. Bernie Sanders announced that he will introduce legislation in the next Congress to break up the banks. He doesn’t give any specifics there or in the agenda he announced recently for a potential presidential run. So I guess we’ll have to wait and see.

The legislation Sen. Elizabeth Warren introduced in July 2013 was basically a revival of what used to be known as Glass-Steagall – which would separate traditional commercial banking from financial investment firms. While this might be a reasonable step, it would neither break up nor further regulate the “too big to fail” investment firms that were at the heart of the Great Recession. In that sense, I think the public is a bit misled when it’s referred to as “breaking up the banks.”

Sen. Sherrod Brown wins the door prize for proposing legislation that would actually “break up the banks.”

The legislation would place sensible limits on the amount of debt that a single financial institution could take on relative to the entire productive economy. No bank could have non-deposit liabilities valued greater than two percent of U.S. GDP, and no investment bank could have non-deposit liabilities exceeding three percent of GDP. This would only affect the six largest megabanks, which would be given three years to comply by drawing up their own proposals to meet this goal.

After reading about Sen. Brown’s legislation, I understand why Paul Kane, the Washington Post’s Congressional reporter, tweeted this: “Wall Street despises Warren, but it fears Sherrod Brown, new top Dem on Banking committee.”

My question for Senator Brown would be to ask how his proposed legislation would affect wage stagnation and job creation. Anything that destabilizes financial institutions could seriously disrupt the positive trends we’re beginning to see there. Overall, when it comes to income inequality, I tend to support efforts to build up from the bottom rather than tear down at the top. But I’m open to being persuaded that both might be necessary.

In the end though, it doesn’t surprise me that the deep work on an issue like this is coming from someone who tends to be out of the limelight. Keep your eye on Sen. Sherrod Brown!

Nancy LeTourneau

Nancy LeTourneau is a contributing writer for the Washington Monthly.