Nearly everyone in Congress believes taxpayers should never again be responsible for bailing out “too big to fail” financial institutions. But few agree on how to create an environment that insulates taxpayers from systemic risk and maintains favorable market conditions for financial institutions. There may even be differences among Democrats.
On the whole, Democrats are pushing for strong regulations over banks deemed financially significant, but they differ on the details. And the two leading Democratic presidential contenders are complicating the issue.
On Tuesday, Sanders presented his case for regulating Wall Street. In particular, he called for breaking up the largest banks within one year of assuming office. Crucially, Sanders said he wants to break up banks if they pose significant risk to the economy, but also if they have too much “economic and political power” by virtue of their size.
That policy stakes out a much more aggressive position than Sanders’ primary opponent Hillary Clinton, whose Wall Street plan calls on regulators to make sure that large financial institutions can be managed effectively. If financial institutions fail to demonstrate “appropriate accountability,” Clinton’s regulators would “require that they reorganize, downsize, or break apart.”
The distinction may be reflected in Congress among the supporters of the two candidates. For example, Rep. John Delaney, a Clinton supporter, is most worried about keeping financial institutions stable. “It’s incredibly important that financial institutions, particularly the large ones, which are systemically important, maintain the proper levels of capital,” the Maryland Democrat told Morning Consult on Wednesday. “The higher capital standards that have been imposed are appropriate, and in some cases they should probably be higher.”
Under the 2010 Dodd-Frank financial reforms, financial firms with more than $50 billion in assets must abide by stricter capital standards as well as undergo regular “stress tests” by federal regulators. Clinton’s campaign platform sets Dodd-Frank as a baseline reform for financial markets.
Rep. Keith Ellison, a Sanders supporter, goes further in his criticism of the biggest banks. “If you’re too big to fail, you’re too big to exist. I think their existence stifles competition and puts a burden on the taxpayer,” the Minnesota Democrat and leader of the Congressional Progressive Caucus said in an interview Wednesday.
Asked if he had to choose between Clinton’s or Sanders’ plans, he said, “I would support Senator Sanders’ approach because it’s more aggressive.”
Part of Sanders’ more aggressive approach stems from his belief that banks’ political power enables them to unduly influence the political process and water down essential regulations.
Ellison said he welcomed Sanders’ top-down approach to regulation. “It is a good thing for Wall Street to know that they must yield to civilian authority in Washington. They should not feel that they’re driving the bus. Elected representatives of the people are doing that,” he said. “When you draw out the regulatory process and it’s slow and unresponsive, I think you just create more problems for yourself in the long run.”
Delaney said that’s an unrealistic way to regulate, perhaps foreshadowing a potential back-and-forth between the two presidential hopefuls. “As a practical matter, the institutions and the regulators collaborate extensively, and they have to do that,” Delaney said. “The regulators rely upon information coming from the institution which they wouldn’t be able to get in an accurate manner if there wasn’t a lot of cooperation.”
Sen. Elizabeth Warren of Massachusetts, an informal arbiter of all things Democrat and financial, has said nice things about both the presidential candidates’ plans. “I’m glad Bernie Sanders is out there fighting to hold the big banks accountable,” she said in a Facebook post after Sanders released his plan. She similarly applauded Clinton last year, when she released her plan.
Republicans, for their part, dismissed any differences between the plans, instead favoring a more hands-off, market-based approach to bank regulation. “It looks like [Sanders and Clinton] want to destroy the big banks. That’s counterproductive,” said Rep. Steve Pearce of New Mexico in an interview.
Pearce blamed election-season politics for the one-upmanship between Sanders and Clinton on the subject of Wall Street reform. “I think that both of them are just trying to outplay each other right now.