Federal Reserve Bank of St. Louis President James Bullard said he would back limiting the size of individual U.S. banks to a proportion of gross domestic product, while warning of the risks from “too-big-to-fail” firms.
“Scaling by GDP would make sense,” Bullard said to reporters today in St. Louis. “Of course, the devil is in the details of exactly how you would do that.”
Fed Governor Daniel Tarullo said yesterday that the U.S. Congress should weigh capping the size of the largest financial institutions. U.S. law permits the biggest banks to grow to such an extent that they increase “perceptions of at least some residual too-big-to-fail quality,” he said in a speech.
“I appreciate that Governor Tarullo is entertaining the idea of size restrictions,” Bullard said. “This is something I do back. We would be better served by putting size restrictions generally on financial firms.”
Tarullo told the University of Pennsylvania Law School that “it would be most appropriate for Congress to legislate on the subject” of limiting size. The idea “that seems to have the most promise would limit the non-deposit liabilities of financial firms to a specified percentage of” GDP, he said.
Fed presidents including Richmond’s Jeffrey Lacker, Philadelphia’s Charles Plosser and Richard Fisher of Dallas have said the Dodd-Frank Act enacted in 2010 won’t necessarily end taxpayer bailouts because it gives regulators discretion to provide rescues. Plosser has called for a bankruptcy law that would set rules for the wind-down of a large financial company.
The Dodd-Frank law gave the Fed and other regulators powers to take over and shut down failing institutions, mandated that the central bank look for evidence of emerging risks to financial stability and required annual stress tests of the largest U.S. banks.
“I do not think we need firms that are so large and complicated in order to have a healthy intermediation sector in the U.S.,” Bullard said to reporters at the St. Louis Fed’s fall economic conference. “We would be better served by a setup that had smaller firms and a competitive landscape across the sector.”
Bullard also said that recent economic data are consistent with his forecast for U.S. growth of about 2 percent in the second half of this year and more than 3 percent next year.
“It probably has been a bit mixed,” he said of recent reports. “You have got some sectors like housing that seem to be doing somewhat better but you have got other parts that are maybe a little more ominous. Europe seems to be maybe a little deeper in recession than what we have seen earlier this year.”
Bullard said he “wouldn’t want to prejudge” his position on monetary policy at the next Fed meeting in two weeks.
U.S. stocks erased gains as optimism about a drop in jobless claims faded and a slump in Apple Inc. dragged down technology shares. The Standard & Poor’s 500 Index was little changed at 1,432.84 in New York.
The Fed yesterday said in its Beige Book summary that the U.S. economy was expanding “modestly” last month, supported by improvements in housing and auto sales, even as the labor market showed little change. A Labor Department report last week showed that while the unemployment rate unexpectedly declined in September, payroll growth slowed.
Bullard joined the St. Louis Fed’s research department in 1990 and became president of the regional bank in 2008. His district includes all of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee.