U.S. authorities should reorganize the country's largest banks to protect against the risk of institutions that are "too big to fail" and that would saddle ordinary Americans with the cost of a bailout the next time they get in trouble, a senior Federal Reserve official said on Wednesday.Issues and Concerns
"We recommend that TBTF (too-big-to-fail) financial institutions be restructured into multiple business entities," Richard Fisher, president of the Dallas Federal Reserve Bank, told an audience at the National Press Club in Washington.
Critics say Dodd-Frank did not go far enough, including several Fed officials who, like Fisher, want the biggest banks reined in.
Fed Governor Daniel Tarullo in October suggested capping the size of banks according to their proportion of U.S. gross domestic product and said that would require Congress to write new laws. But Fisher did not think dictating how big banks could grow was the right course.
"I'm a little reluctant just given my philosophical bent to artificially engineer size," he said, arguing that markets would do a better job of making that judgment.
The outspoken Texan policymaker, blaming such "behemoth" firms for massive bad bets on the U.S. housing market at the root of the crisis and subsequent taxpayer bank bailout, said the Fed should protect their core commercial lending operations -- and nothing else.
He identified 12 "megabanks" with assets of over $250 billion as too big to fail.
"Only the resulting downsized commercial banking operations, and not shadow banking affiliates or the parent company, would benefit from the safety net of federal deposit insurance and access to the Federal Reserve's discount window," Fisher said.
The 12 "megabanks" Fisher identified together account for 69 percent of all U.S. banking assets, but represent only 0.2 percent of the country's 5,600 banks.
"The 12 institutions ... are candidates to be considered TBTF because of the threat they could pose to the financial system and the economy should one or more of them get into trouble," he said.
He did not name them all, but showed a slide displaying the names of five top U.S. banks: JPMorgan Chase , Bank of America , Goldman Sachs , Citigroup and Morgan Stanley .
Fisher said he had received support from lawmakers on both sides of the aisle for his views, which the Dallas Fed has been pressing for over a year, and had even heard from famed dealmaker Sandy Weill, who said he agreed with Fisher.
My first concern is they do not do this at all. My second concern is they do it wrong, leaving loop-holes all over the place as happened with Dood-Frank. They could also target size alone rather than operations.
Glass-Steagall provided physical walls of separation that have since been rescinded. Moreover, banks should be banks not hedge funds.
Much of what Goldman Sachs does is not banking at all. The legislation should not consist of some arbitrary size limit, but rather provide walls of separation and limit banks to be banks.
Of course the real problem here is fractional reserve lending that enables banks to supersize at will, but don't expect that to be fixed.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
