How "Big" Became Bad: America's Underage Fling with Universal Banks

Lawrence G. Baxter, Duke Law School

Available in the Faculty Scholarship collection.


In little more than a decade gigantic new financial institutions have emerged in America. These organizations are quite different from their predecessors in that they share the highly complex, diversified characteristics of foreign “universal banks.” They are still in the process of developing experienced and mature operational and risk management systems. During this same period, the regulatory framework necessary to match the size, power and hazards generated by these new universal banks remains underdeveloped, and the primary framework around which the system is being constructed, namely Basel II, lies in tatters in the wake of the financial crisis of 2007-08. Given the size and interconnectedness of these universal banks, it is dangerous to permit their continued growth unless and until we develop a proper regulatory framework for supervising them. This article suggests that such a framework can only be developed fully once a single regulator, such as the Federal Reserve System, acquires comprehensive power to supervise large universal banks. Pending such reform, the article offers three actions that current regulators could take to slow the growth of universal banks down to a safe level. These are merger approval conditions that would require: (i) the filing and approval of a detailed, binding implementation and operation plan for any proposed combination; (ii) the filing and approval of a dissolution plan for the entity, should the combination run into difficulties; and (iii) the development and publication by the primary regulator of a regulatory plan for the new combination, detailing the resources required, where these resources would come from, and the methodology to be adopted in supervising the proposed entity.