Federal Reserve Bank of Dallas President Richard Fisher said he advocated breaking apart banks deemed too big to fail in order to “level the playing field” between smaller and larger financial institutions.
The regional Fed bank is proposing that such financial firms be restructured into multiple business entities. Only the commercial banking pieces of the companies would have access to the safety net of federal deposit insurance and the Fed’s discount window, he said.
“One of the reasons we did this is to level the playing field” between the smaller and bigger financial institutions, Fisher said in an interview today at Bloomberg’s office in Washington. The drive to fix a system with too-big-to-fail banks is “gaining momentum, and now that the election has passed, it has some political gravitas. We’ll see.”
The Dallas Fed released a report today that highlighted the strengths of smaller community banks that focus on traditional lending activities, such as mortgages and small-business loans. The Independent Community Bankers of America said in a statement that it “strongly supports” Fisher’s plan.
U.S. regulators are searching for ways to make the financial system more resilient after the 2008 credit freeze led to the worst U.S. recession since the 1930s. Implementing the Dodd-Frank Act, an overhaul of the banking system that was signed into law in 2010, is not enough to protect the country’s financial system, Fisher said.
“We labor under the siren song of Dodd-Frank and the recent run-up in the pricing of TBTF bank stocks and credit, indulging in the illusion of hope that this complex legislation will end too big to fail and right the banking system,” Fisher said at the National Press Club yesterday.
Since 2009 Fisher has been criticizing what he has called the “pathology” of banks deemed too big to fail.
The Government Accountability Office said this month that it plans to study how large banks such as JPMorgan Chase & Co. (JPM:US), Bank of America Corp (BAC:US). and Citigroup Inc. (C:US) benefit from assumptions that they are too big to fail. The examination will be undertaken in response to a request from Senators David Vitter, a Louisiana Republican, and Sherrod Brown, an Ohio Democrat, who say the government hasn’t done enough to prevent future bailouts.
“It’s not just that it doesn’t treat too-big-to-fail,” Fisher added in his interview today, referring to the Dodd-Frank banking overhaul. “What it does is it overburdens the competition.”
Every customer, creditor and counterparty of shadow banking affiliates should also be required to sign a statement that acknowledges the fact that these entities are not protected by the federal government, Fisher said yesterday.
“The next financial crisis could cost more than two years of economic output, borne by millions of U.S. taxpayers,” he said.
The district bank president is not a voting member of the Federal Open Market Committee this year and has been one of the most outspoken critics of additional monetary easing within the Fed.
Fisher told reporters after his remarks yesterday that the Fed’s asset purchases haven’t been as effective as he would have liked in boosting the economy. This is partly because the too- big-to-fail problem has clogged the transmission mechanism between Fed stimulus and the economy, he said.
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