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Bernanke Says U.S. Must End ‘Too Big to Fail’ Bank Subsidy

Federal Reserve Chairman Ben S. Bernanke said
Federal Reserve Chairman Ben S. Bernanke said "the benefits of being large are going to decline over time, which means some banks are going to voluntarily begin to reduce their size." Photographer: Andrew Harrer/Bloomberg

Feb. 26 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said he wants to end investor perceptions that the largest U.S. financial institutions will be given taxpayer bailouts to prevent a collapse.

“We need to stop too-big-to-fail,” Bernanke said in testimony to the Senate Banking Committee in Washington today in response to a question from Senator Elizabeth Warren, Democrat of Massachusetts. “As somebody who’s spent a lot of late nights trying to deal with these problems and the crisis, I would very much like to have the confidence that we could close down a large institution without causing damage to the rest of the economy.”

Warren cited a Bloomberg View article estimating that the largest U.S. banks receive an implicit taxpayer subsidy amounting to $83 billion a year because their funding costs are lowered by the perception they won’t be allowed to fail.

“These big financial institutions are getting cheaper borrowing to the tune of $83 billion in a single year simply because people believe the government will step in and bail them out,” Warren said. “I’m just saying, if they’re getting it, why shouldn’t they pay for it?”

“I think we should get rid of it,” Bernanke said.

Regulators and lawmakers are seeking ways to minimize the risk the government will again need to rescue the nation’s largest financial institutions, as it did during the financial crisis with bailouts of firms including Citigroup Inc. and American International Group Inc.

Dodd-Frank

The 2010 Dodd-Frank Act gave the Federal Deposit Insurance Corp. power to wind down failing firms, and banks must draw up “living wills” spelling out how that could be done. Even so, officials, including Fed Governor Daniel Tarullo, Dallas Fed President Richard Fisher and Senator Sherrod Brown of Ohio, a Democrat, say more should be done to limit the size of banks.

“We’re moving in the right direction,” Bernanke said in response to Warren’s questions. “Over time you’ll see increasing market expectations that these institutions can fail,” he said. “The benefits of being large are going to decline over time, which means some banks are going to voluntarily begin to reduce their size.”

New strategies under consideration range from legislation to cap the size of big banks or make them raise more capital to regulatory actions to discourage mergers or require that financial firms hold specified levels of long-term debt to convert into equity in a failure.

To contact the reporter on this story: Aki Ito in San Francisco at aito16@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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