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Breaking Up The Banks May Be More Complicated Than It Seems

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The JPMorgan Chase headquarters is seen in New York. Sen. Bernie Sanders has said it and other major banks are too big and powerful.

Sen. Bernie Sanders says that if he is elected president in November, one of his first acts in office would be to begin breaking up the large financial institutions that pose a grave risk to the economy.

But there's a problem with that idea: It's not clear the president has the legal authority to break up the banks.

"It's not something the president can do. It's not even something the Treasury can do," says Karen Shaw Petrou, managing partner of Federal Financial Analytics.

Banks are largely regulated by a patchwork of state and federal agencies, such as the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency.

Regulators can, for example, require a bank to hold more capital if they deem some of its activities too risky.

Meanwhile, the new Financial Stability Oversight Council, which was formed as part of the Dodd-Frank financial overhaul, has a lot of ammunition in its holster, including the ability to designate a non-bank financial institution as systemically important and force it to make changes in its operations.

Such agencies can make life very difficult for big banks, if not shut them down altogether.

"There's no doubt that the regulators have the ability to put tougher rules on the larger banks, (and) create an incentive for the larger banks to break up," says Marcus Stanley, policy director for Americans for Financial Reform, a progressive group that advocates for bank reform.

But agencies such as the Fed and the FIDC were designed to be independent bodies, free of political pressure, and the White House can't just order them to shut down a bank because it wants them to, Petrou says.

Presidents do have the power to appoint regulators and they generally appoint people who share their political goals, which gives them broad power to set policy.

"There's a saying in D.C. that personnel is policy, meaning that the people that you appoint are really the ones who determine what the policies are really going to be on the ground," Stanley says.

"The main thing that the president can do is really appoint people who will actually dare to do stuff that they have authority to do," says Anat Admati, professor of finance and economics at Stanford University Business School. "Because in my view a lot of the problem is the political will to actually act and withstand the pressure of the banks through the direct channels and through all the political lobbying that gets done against everything they don't like."

But even the regulators' power has its limits.

Agencies such as the Fed can highlight problems and demand they be addressed, but before they start dismantling a bank they have to prove the problems can't be addressed in some less draconian way, Petrou says.

"They could say, 'We don't like your brokerage operations. We think you need to get rid of them.' They can't just do it because they don't like big banks," Petrou says.

Admati, co-author of The Bankers' New Clothes: What's Wrong with Banking and What to Do About It, says regulators ultimately have the power to break the banks up, but the process wouldn't be as quick or easy as Sanders has sometimes suggested, she says.

"It's all just very slow and very cumbersome," Admati says. "There are things (a president) can do, but it's not a clear order from today or tomorrow or anything like that."

Then too, the banking industry has one of the most effective lobbies in Washington and can be counted on to strenuously oppose any effort to break up financial institutions. It's already had some success.

The Financial Stability Oversight Council originally designated MetLife as one of four "systemically important financial institutions" that could threaten the broader economy if they collapsed. The move subjected the company to greater federal oversight.

The company sued in federal court to get the designation and last month a federal judge ruled in its favor.

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