Is the Public Utility Holding Company Act a Model for Breaking Up the Banks that are Too-Big-to-Fail?

56 Pages Posted: 22 Sep 2010

Date Written: September 22, 2010


During the financial crisis of 2007-08 and the debates on regulatory reform that followed, there was general agreement that the “too-big-to-fail” principle creates unacceptable moral hazard. Policy makers divided, however, on the solutions to this problem. Some argued that the banking behemoths in the United States should be broken up. Others argued that dismantling the big banks would be bad policy because these banks would not be able to compete with universal banks in the global capital markets, and in any event, breaking up the banks would be impossible as a practical matter. Therefore, better regulation was the right solution. This approach was generally followed in the financial reform legislation (“Dodd-Frank”) that was passed. Yet voices in favor of a return to the Glass-Steagall Act of 1933 wall between commercial and investment banking, or using some other techniques for curtailing risky bank activities, continue to be heard and studied. Therefore, further inquiry concerning the question of whether and how the big financial institutions should be curtailed remains relevant, even after the passage of Dodd-Frank.

In the past, the United States has taken a variety of approaches to reining in banks. These include capital constraints, geographical restrictions, activities restrictions and conflict of interest restrictions. The primary techniques for reining in big banks considered by Congress or financial regulators in current regulatory reform efforts are increasing capital requirements, taxing financial transactions and walling off proprietary trading and/or derivatives trading from commercial banking. In addition, the reform legislation will put into place a resolution regime for failed financial institutions. All of these approaches are discussed in this Article.

One approach that has not been tried or even seriously discussed with regard to the big banks is the approach that was used to break up the utility pyramids created during the 1920s, that is the antitrust approach utilized in the Public Utility Holding Company Act of 1935. This targeted and highly effective regulatory framework empowered the Securities and Exchange Commission (“SEC”) to dismantle and simplify the corporate structures of the utilities without destroying them. This program was so successful that even after it was essentially completed the statute and SEC regulation of utilities remained on the books until quite recently. This article argues that this approach should be considered as a solution to the too-big-to-fail problem since it combines deconcentration, capital limits, activities restrictions and conflict of interest restrictions as an alternative to antitrust regulation, outside of adversarial prosecutorial case development.

Keywords: Too Big to Fail, Dodd-Frank, Public Utility Holding Company Act, Systemic Risk, Bank Regulation, Securities Regulation, Moral Hazard, Antitrust

Suggested Citation

Karmel, Roberta S., Is the Public Utility Holding Company Act a Model for Breaking Up the Banks that are Too-Big-to-Fail? (September 22, 2010). Brooklyn Law School, Legal Studies Paper No. 202, Available at SSRN: or

Roberta S. Karmel (Contact Author)

Brooklyn Law School ( email )

250 Joralemon Street
Brooklyn, NY 11201
United States
(718) 780-7946 (Phone)
(718) 780-0375 (Fax)

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