WASHINGTON: Breaking up big banks is one of the rallying cries of liberals when it comes to the economy. Now Hillary Rodham Clinton has all but embraced the cause.

Her campaign announced on Thursday that Clinton would seek to break up banks that regulators deem “too large and too risky,” according to a proposal her campaign released, a direct strike at the “too big to fail” institutions that have grown larger in the wake of the financial crisis. The proposal adds to the Democratic front-runner’s calls for further tightening of financial regulations on Wall Street.

Clinton’s proposal also seeks a tax on certain forms of computerised trading that critics say create financial instability, improved transparency in markets where prices aren’t publicly disclosed, and harsher penalties for banking executives whose subordinates violate the law.

Another provision would levy a tax on liability held by major banks. The fee could lessen the advantage that banks enjoy when they are viewed as too big to fail. Creditors who think the government would bail out a bank in a crisis will accept discounted interest rates on money they lend to the bank, confident it will be repaid.

As a complement to the fee, the proposal says that Clinton would support rules that banks hold even more money in reserve — known as capital requirements.

Clinton’s plan “would make life very difficult for JPMorgan [Chase] in its current form,” said Dean Baker, co-director of the liberal Centre for Economic and Policy Research and an advocate of stricter financial regulations.

“She is clearly saying both that we have banks that are too large and pose too much danger to the economy, and that the financial sector has become too big and too complicated,” Baker said. “It’s really changed the debate.”

As president, Clinton would need congressional approval to implement some important provisions. Others would depend on the Federal Reserve. And in many cases, the devil would be in the details.

For example, would the criteria for “too large and too risky” be generous and allow current banking behemoths to operate as they currently do? Would the big ones indeed be forced to break up? Or would there be a compromise?

Despite the passage of the Dodd-Frank financial-overhaul law in 2010, investors still view some banks as being too big to fail.

“The expectation of government support for the largest bank-holding companies is very strong,” said Simon Johnson, an economist at the Massachusetts Institute of Technology, adding that the largest banks are so complex and enigmatic that rational investors wouldn’t trust them with their money if they weren’t counting on help from Uncle Sam in a crisis.

“The businesses would not exist,” he said. “Creditors would not take on JPMorgan exposure, with this really opaque structure, unless they believed there is a substantial probability that the government is going to step in and make them whole.”

If nothing else, the tone of the proposals may allay concerns among some liberals about Clinton’s connections to Wall Street. Many of her advisers previously held posts in finance. Facing increasing pressure from liberal Sen. Bernie Sanders (I-Vermont) in the Democratic primary, Clinton has recently advanced a range of liberal positions in addition to the tough approach to Wall Street, including opposition to the Asian trade pact and the Keystone pipeline.

Clinton’s aggressive proposals suggest a shift in thinking about the financial industry among the party’s policymakers and its rank and file, Baker said. When Clinton’s husband served as president, many leading Democrats believed that financial innovation was beneficial, but the securities developed on Wall Street during that period would later be blamed for the financial crisis.

“We were developing all these new financial instruments, and the view of the people in the Clinton administration was that that was fantastic,” Baker said. “It’s a remarkable switch.”

By arrangement with The Washington Post

Published in Dawn, October 11th , 2015

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