One of the enduring ironies of the 2008 financial crisis is that nearly everyone now dislikes big banks, but no one can agree what to do about them. Policymakers as diverse as Bernie Sanders, Elizabeth Warren, John McCain, Newt Gingrich, and even President Donald Trump, have called for shrinking the largest financial firms. In fact, both the Democratic and Republican parties endorsed breaking up the banks in their policy platforms for the 2016 election.
This apparent consensus in favor of breaking up the banks stems, in large part, from a perception that some U.S. financial institutions are “too big to manage” (TBTM). A financial institution is TBTM if its size prevents executives, board members, and shareholders from effectively overseeing the firm, leading to excessive risk taking and misconduct. Officials from both the Obama and Trump Administrations have cited the TBTM problem as a catalyst for the 2008 financial crisis. On this view, many of the largest U.S. financial companies collapsed because management was unable to monitor the firms’ risk profiles.