Room for Debate

Why Megabanks Stay Huge

Lynn Stout

Lynn A. Stout is the Paul Hastings professor of corporate and securities law at U.C.L.A. and an expert on corporate governance and moral behavior. Her latest book is "Cultivating Conscience: How Good Laws Make Good People."

Updated December 20, 2010, 1:05 PM

The 2008 credit crisis and its economic fallout have left us with even fewer banks that are even bigger than before. This poses obvious dangers of systemic risk. When a very large financial institution collapses, whether through bad judgment or bad luck, it can bring down many other firms that have financial connections to it in its wake. “Too big to fail” is threat to all of us.

Politicians and regulators aren't eager to break up the megabanks since that would only make fundraising and job-seeking harder.

How to deal with the problem? One obvious possibility is to break up the existing megabanks and adopt legal rules that discourage others from growing too gargantuan. Although banks may argue they need to be huge to stay competitive, there is little or no evidence to support the claim banks need to be enormous to perform banking functions. Yet neither the Congress nor the administration has embraced the “don’t get too big” approach. To the contrary, our lawmakers seem to think the only reasonable strategy is to focus on “don’t fail.” Why?

Because politicians and regulators have good reason to love big banks — and the bigger the bank, the better. According to, commercial banks gave nearly $40 million in contributions, to both parties, during the federal election campaigns of the 2008 election cycle.

This happened because executives at megabanks like Citigroup, J.P. Morgan, or Bank of America have plenty of money, and they are eager to donate it to keep their firms from being downsized, because their pay and prestige is tied to the size of their companies. Knowing this, candidates and political parties see banks and banking executives as easy fundraising targets: there is no better way to become popular with Wall Street contributors than to suggest you’re thinking about ruining their business model. As for regulators, big banks offer wonderful opportunities for revolving-door jobs and other perks. (Recall Larry Summers’ $135,000 speech at Goldman Sachs shortly before he was appointed, as expected, to be the president’s economic adviser.)

Politicians and regulators may act as if they’re thinking about reining in giant banks, but this seems to be just a political head-fake. From their perspective, actually breaking up the megabanks would only make fundraising and job-seeking harder. It’s much more difficult and time-consuming to raise $5,000 from 20 small banks, than it is to raise $100,000 from one enormous bank. And big banks can’t hide. Because they clearly suffer most from threatened regulation, a big bank can’t afford to refuse to take a senator’s call.

This view is admittedly cynical. Sometimes, however, cynicism is appropriate. If American taxpayers want to convince the banking industry that small can be beautiful, the first folks they may need to convince are their own elected lawmakers.

Topics: Economy, banking system, banks

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