A better approach to banks

Regarding the March 13 front-page article “U.S. intervenes to protect failed bank’s deposits”:

The 2008 financial meltdown revealed the inability of banking regulation to prevent financial crises. This led many observers, including then-sen. Ted Kaufman (D-del.), former Federal Reserve chairman Paul A. Volcker and former Citicorp chairman John Reed, to call on the Obama administration and Congress to adopt a nonregulatory approach. That approach was first suggested by Justice Louis D. Brandeis a century ago and is reflected in a number of New Deal laws — legislation limiting the size and activities of financial institutions so that none is “too big to fail.”

But key players had reason to oppose legislation incorporating Brandeis’s approach. It is easier for Congress to buck responsibility to regulators rather than to make difficult decisions itself. Regulators are not inclined to give up turf, even to Congress. Firms would rather deal with regulators possessing broad discretion than abide by strict statutory limits.

So the administration and Congress rejected the Brandeis approach. Instead, the Dodd-frank Act of 2010 greatly expanded regulators’ existing broad authority and created new regulatory bodies such as the Financial Stability Oversight Council.

The current crisis demonstrates yet again that government regulation, however well intended and however strengthened, cannot prevent financial crises. The time is long overdue to move to the Brandeis approach.