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Is Your Bank in Regulators’ Crosshairs?

OCC federal banking regulator

In the aftermath of the 2008 financial crisis, big US banks faced numerous calls to be broken up. After a $700 billion bailout and fears that the financial system had been on the verge of collapse, Americans wanted to ensure that such a crisis never occurred again.

Instead of being broken up, however, some of the biggest banks got even bigger. Failed banks or those that were weakened were scooped up by competitors. And instead of a bank breakup we got the Dodd-Frank Act, something that was supposed to end “too big to fail.”

Dodd-Frank, like banking regulations before it, failed to touch the root cause of the weakness of the banking system, namely the problems inherent to fractional reserve banking. Because of that, banks have gotten larger, more complex, and no less prone to failure.

US regulators have finally decided that they are aware of the problems facing big US banks, and they’re threatening to break up the biggest banks if they become “too big to manage.” They wouldn’t be broken up just due to their size but rather due to executive mismanagement.

According to the Acting Comptroller of the Currency, regulatory failures at big banks might be a sign that banks are too big to manage, and could subject them to being broken up by the federal government. Take, for example, Wells Fargo, with its series of recent scandals. If there were ever a bank that should be sweating bullets right now, Wells Fargo would be it.

This threat to start breaking up big banks is something that hasn’t been seen as a possibility in recent years. The idea of the government forcing banks to break up seems like something you might see in Russia or China, not in the US. But now that the threat has been made, banks (and their customers) are going to have to deal with it and take it seriously.

The question you have to ask yourself is, how could this affect your finances?

Big Banks Make for Big Targets

Banks and financial institutions have been targeted for criticism for centuries. From President Jackson’s decision not to renew the charter for the Bank of the United States, to criticism of the “money trust” in the early 20th century, to dissatisfaction at Wall Street in the early 2000s, just about anyone from every political persuasion has something they can find fault with in the banking system. Because of their size and influence, big banks are naturally going to be targets, and now they appear to be becoming targets for federal financial regulators.

How serious is the Office of the Comptroller of the Currency (OCC) about breaking up big banks? Well, the Acting Comptroller still is just the acting head, so things could obviously change with a new head, or if a new administration takes power in 2025. But the ground rules have been laid down, and the threat, now that it has been made, is going to be out there.

That means that if you bank at Wells Fargo, Bank of America, Citi, or any other of the largest US financial institutions, your bank could come under fire if OCC thinks it is being poorly managed. While we may think of this today in terms of financial scandals, the Overton window of potential behavior that could merit a breakup could expand over time. Mission creep is a thing, you know, and bureaucracies often look to justify their existence and budget by doing things just for the sake of doing them.

Just imagine what might happen if Wells Fargo were to be broken up. What would that even look like? Would the bank depositing arm be spun off on its own? What would happen to the securities division, or the mortgage and auto loan division? How about credit cards? If you’re the type of customer who has all of his accounts at one bank, you could be left with accounts at multiple different institutions once the breakup is over, some of which you might not be happy with.

This is also a reminder that, no matter how much we like to believe that the US is a free market economy, at the end of the day the government ultimately exercises control over everything. And if the government decides that it wants to break up your bank, it’s going to do it.

Diversifying Your Assets

The other important takeaway from this is that you shouldn’t put all of your eggs in one basket. It may be convenient to keep all of your money at one big bank with a large branch and ATM network, but with regulators now taking aim at big banks, those advantages may not last forever.

While the threat right now seems to be just to the banks, and not to actual depositors, what harm could befall depositors? Presumably, if a big bank were to be broken up, regulators would try to make sure that the new banking units created were financially sound and that depositors and investors wouldn’t lose any assets. But that’s no guarantee that the new post-breakup units would be any better managed. And they could very well end up being worse managed and performing worse, leaving customers worse off.

With regulators starting to flex their muscles and threaten breakups of large banks, maybe it’s time for you to reassess whether you need to diversify your financial assets. If your money is all at one large bank, could it make more sense for you to start breaking up your holdings?

If your retirement savings are all at one institution or in one plan, could it make sense to open new accounts, roll over assets from a 401(k) to an IRA, or look into other options? If your assets are all held in conventional financial assets like stocks and bonds, is it worth looking into exploring alternative assets such as real estate, gold and silver, or commodities?

Market risk has always been the dominant factor for most savers and investors when it comes to figuring out what to do with their money. But aggressive regulation introduces political risk into the equation, a political risk that was once unforeseen and that could end up being unpredictable. Don’t let your hard-earned money just sit there to fall victim to whatever may happen. Start learning more about your options today.

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