Large banks stand squarely against any proposal that would break them up, and their man in Washington, D.C., former Minnesota Gov. Tim Pawlenty, jumped into the fray Tuesday morning.
Pawlenty, now head of the Financial Services Roundtable, laid out a message that has become the mantra of the financial industry and many within the economic discipline: that financial reform since the crisis, specifically the Dodd-Frank Act, is already working.
"There's more capital, more cushion, two or three times more than in these banks before the crisis, more oversight, living wills, provisions to wind down and allow institutions to fail, taking out their management, taking out their shareholders, and making the industry pay for failures," Pawlenty said on CNBC. "All of that's what's on paper in Dodd-Frank and the people in the Obama administration says that ends too big to fail."
But it doesn't take a bank lobbyist to punch holes in a proposal to break up the banks.
At Minneapolis Fed President Neel Kashkari's first symposium on the topic of too-big-to-fail financial institutions and the risks they pose to the nation, headliner Simon Johnson, an MIT economist, suggested a cap on assets for banks of 2 percent of U.S. GDP, a limit that would force several large banks, including Wells Fargo, U.S. Bank and Bank of America, to break up.
Critics laid into the idea.
Joseph Hughes of Rutgers argued that banks have a strong business case for being large because it gives them economies of scale. Gene Ludwig, a consultant to the financial industry, said the topic needs more study. Patrick Kehoe, the Minneapolis Fed economist, likened the idea of breaking up the big banks to throwing a hand grenade at a beehive after getting a bee sting.
The economist with the clearest objections was Aaron Klein, of Brookings, who questioned how large banks would be cut in size without damaging consequences.