Would breaking up big banks bring down risky assets?

Many bank customers remained weary of big banks after the financial crisis, concerned with many of the bad loans stemming from major lenders. A number of financial institutions responded, lending to only the most qualified borrowers. The idea of “too big to fail” continued to be debated. If banks know there is a slim chance of being shut down, would the reckless lending have continued and the bad mortgages created? While this question may forever go unanswered, one former treasury secretary explained that its the risk assessment tools we should be looking at, not the size of the bank.

In an American Banker article, former Treasury secretary Robert Rubin explained that when former Citigroup CEO Sandy Weill suggested last summer breaking up major banks would prevent another similar crisis, the risks would simply follow, not disappear. 

“For example, if you could curtail what the banks can do in terms of trading, it isn’t that the trading is going to go away,” he said in an interview with CBS. “You have a large global economy that needs those activities but they’ll go to other platforms. I think the real question is, are there ways to deal with the risk?”

Rubin also worked as a senior advisor at Citigroup, and has been criticized for not stopping bad loans originated during his time, and on his paycheck. Now, he stated in the interview that he could have done more, but banks also should consider increasing capital reserves as a precaution.

While some of the mistakes made before the recession were a result of the infallible attitude, Rubin also shows that credit and risk management are vital for any financial institution, big or small. 

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