Introduction

The recent losses at JPMorgan Chase, the money laundering activities of HSBC, and the recent discovery of collusive activity to influence the London Interbank Offered Rate by the money market desks of some of the largest global banks, some two years after the adoption of the Dodd-Frank Act, have led to calls for a more rigorous approach to the regulation of large multifunction banks that are clearly too big to manage and too big to regulate. One response has been to suggest a simple breakup of the largest banks.

Both the president of the Federal Reserve Bank of Dallas, Richard Fisher (2012), and the former president of the Federal Reserve Bank of Kansas City, Thomas Hoenig (2009), have formally proposed the dissolution of the largest complex US financial institutions that dominate the financial system. But this proposal deals only with the size of financial institutions; it does not indicate what the structure of the smaller institutions should be. Creating a greater number of smaller, independent financial holding companies would not necessarily simplify supervision if these companies were still dealing in multiple types of complex, interconnected financing activities involving structured lending instruments. Simply making institutions smaller need not make them safer and more stable, if they are permitted the same range of activities involving the same types of financial instruments.