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Richard Fisher Wants A Warning Label for Banks
Richard Fisher, the president of the Federal Reserve Bank of Dallas, has a great plan for ending the federal safety net for too-big-to-fail banks. Under his proposal, which would require new legislation, only commercial banks would have access to government deposit insurance and discount-window loans provided by the Fed. This would be reinforced by "a new covenant", as he called it during a speech last night in Washington, D.C. It's a genuinely creative idea. He said:
To reinforce the statute and its credibility, every customer, creditor and counterparty of every shadow banking affiliate and of the senior holding company would be required to agree to and sign a new covenant, a simple disclosure statement that acknowledges their unprotected status.
Here's a sample disclosure he suggested:
WARNING: Conducting business with this affiliate of the ____________ bank holding company carries NO federal deposit insurance or other federal government protection or guarantees. I ____________, fully understand that in conducting business with ____________ banking affiliate, I have NO federal deposit insurance or other federal government protection or guarantees, and my investment is totally at risk.
Fisher, a longtime advocate of reducing the size of the country's largest banks, said:
This two-part step should begin to remove the implicit TBTF subsidy provided to BHCs and their shadow banking operations. Entities other than commercial banks have inappropriately benefited from an implicit safety net. Our proposal promotes competition in light of market and regulatory discipline, replacing the status quo of subsidized and perverse incentives to take excessive risk.
He went on:
Some government intervention may be necessary to accelerate the imposition of effective market discipline. We believe that market forces should be relied upon as much as practicable. However, entrenched oligopoly forces, in combination with customer inertia, will likely only be overcome through government-sanctioned reorganization and restructuring of the TBTF BHCs. A subsidy once given is nearly impossible to take away. Thus, it appears we may need a push, using as little government intervention as possible to realign incentives, reestablish a competitive landscape and level the playing field.
Fisher may be a lonely voice at the Fed. But his campaign to end too-big-to fail is a cause worth fighting for. The Dallas Fed has taken an impressive leadership role on this subject. All we need now is for the rest of the federal government to follow. It's the government that needs to come around to the views of mainstream Americans on this issue, not the other way around.
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