Federal Reserve Bank of Dallas President Richard Fisher said banks deemed too big to fail must be broken apart to prevent the next financial crisis from happening.
“We recommend that TBTF financial institutions be restructured into multiple business entities,” Fisher said in the text of prepared remarks in Washington today. “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.”
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.
Fisher has been criticizing what he has called the “pathology” of banks deemed too big to fail since 2009.
The Government Accountability Office said this month that it plans to study how large banks such as JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. 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.
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 today.
“The next financial crisis could cost more than two years of economic output, borne by millions of U.S. taxpayers,” he said.
In his speech today, the district bank president didn’t comment on the outlook for monetary policy or the economy. He 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 that the Fed’s asset purchases haven’t been as effective as he would have liked in boosting the economy, adding that those measures have become less effective over time. This is partly because the too-big-to-fail problem has clogged the transmission mechanism between Fed stimulus and the economy, he said.