While investors, regulators, politicians and the general public may be screaming for big banks to shatter into tiny pieces, Wall Street leaders are unlikely to waiver from the status quo, says a BusinessWeek article today.
“Wall Street banks are likely to cling to the status quo, which gives them two advantages: cheap funding in the form of deposits and lower borrowing costs because investors believe the government stands behind them,” the story says.
Should banks break up, we would find ourselves with smaller firms that cannot accept deposits, and therefore would have to borrow at a premium. Also, these smaller firms would be forced to hold more capital to cushion against losses, since they would not be government-backed. Case in point: Last year’s bankruptcy of MF Global was an example of how securities firms not attached to banks are high-risk.
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