Breaking Up Bank of America?

Michael Stephens | January 25, 2012

Speaking of too big to fail, a petition organized by Public Citizen has been sent to the Federal Reserve and Financial Stability Oversight Council (FSOC) calling for the break up of Bank of America.  The petition identifies BofA, given its size and fragility, as a threat to the US financial system.  It cites a recent NYU study that ranks the financial institution as posing the greatest systemic risk among US firms, based on capital shortfall.  Public Citizen also argues that Bank of America is simply too large and too interconnected to be regulated effectively.

Micah Hauptman explains that the break up and reorganization could be carried out under the authority given to the Fed and FSOC under section 121 of the Dodd-Frank Act (if a financial institution is determined to pose a “grave threat”).  The petition argues that taking action now under section 121 is preferable to attempting an orderly liquidation in the midst of a crisis:

If the Agencies do not use section 121 in advance of financial distress at a firm that poses a grave threat to U.S. financial stability, they risk undermining other critical Dodd-Frank Act provisions. Many Dodd-Frank Act provisions related to systemic risk would be far easier to implement if systemically important institutions were smaller and less complex. One of the most critical is the orderly liquidation authority in Title II.

If a large, systemically dangerous institution such as Bank of America were to fail, regulators would have only one course of action—to attempt orderly liquidation. To permit the institution to fail without intervening would result in financial disaster; to bail it out would sharply contradict the Dodd-Frank Act’s express policy of “protect[ing] the American taxpayer by ending bailouts.” But the Dodd-Frank Act’s orderly liquidation procedures are untested and could prove difficult to implement in practice, particularly with respect to the largest and most complex institutions such as Bank of America.

One potential problem with the orderly liquidation authority is that U.S. officials lack jurisdiction over extraterritorial entities and therefore may be unable to put globally significant institutions through resolution. Currently, there are no existing international agreements regarding the resolution of a domestic institution’s entities that operate in foreign countries. Without such agreements in advance, regulators would need to try to reach agreements, potentially requiring changes in the laws of multiple countries, in the midst of a crisis.

You can read the petition here and a related letter, signed by economists, legal scholars, and various public interest groups, here.

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