In a recent speech to a Committee of the Republic event held at the National Press Club, Dallas Federal Reserve President Richard Fisher presented a remedy for our “Too Big To Fail” (TBTF) banking system that is fair, simple and filled with common sense.
Currently, 0.2 percent of the bank holding companies control 69 percent of the total U.S. banking assets. However, these institutions are regarded as “too big to fail” under the assumption that the entire economy would be adversely affected. While this conclusion may be accurate, we can change the rules that would reduce the negative implications of future failures.
Since these financial institutions have implicit guarantees of success by the taxpayers, they willingly take on more risk to achieve greater profit at much lower cost than those faced by their competitors. Nearly half of their liabilities are uninsured/unsecured, since they involve high-risk non-banking activities (“shadow banking”), such as non-banking insurance, investment banking and other financial services.
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Despite this high degree of risk, the implicit government guarantee affords them a safety premium from investors, which permits lower borrowing costs — typically 1 percentage point less than that for their counterparts.
Moreover, Fisher estimates the annual subsidies to TBTF institutions total approximately $300 billion — nearly three times the $108 billion in total earnings for these banks in 2011.
To address this issue most directly, effectively and efficiently, Fisher prudently proposes a system in which only FDIC-insured commercial banking activities qualify for taxpayer protection, such as deposit loss insurance and low-interest discount window loans from the Federal Reserve Bank. All other activities would not receive access to this federal safety net. This disclosure would be explicitly entered into by all entities, including customers, bank and non-bank affiliates, senior holding companies and all counterparties.
As a former hedge fund manager, Fisher proclaimed that it is possible to manage high-risk, complex financial products in a safe, effective and prudent manner, unlike what we witnessed during the recent financial crisis. He fears we risk a reenactment of the crisis if the current policies remain in place, resulting in years of lost economic activity borne by millions of taxpayers.
In a hint that there may be light at the end of the tunnel, he referred to the comments of Sanford Weill, former chairman and CEO of Citigroup, who championed the high-risk mingling of commercial banking, investment banking and insurance during the 1980s, 1990s and 2000s. Weill was instrumental in the successful repeal of Glass-Steagall in 1999 by President Bill Clinton. It should be noted, despite the law being in place until 1999, it was not adhered to in many ways for many years. Recent remarks by Weill suggest we should return to the era of banking that he worked so hard to overturn.
His advocacy, along with the political capital of 99.8 percent of the banking industry that do not receive implicit and unlimited government guarantees, can begin to form a coalition that demands fairness and protection from future economic catastrophes caused by the financial industry.
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