Federal Reserve Bank of Dallas President Richard Fisher said regulators should break up so-called too-big-to-fail financial institutions to curtail the risk they pose to financial stability.
“I believe that too-big-to-fail banks are too-dangerous-to-permit,” Fisher said in the text of remarks given in New York today.
“Downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the appropriate policy response. Then, creative destruction can work its wonders in the financial sector, just as it does elsewhere in our economy.”
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Regulators in the U.S. and abroad have attempted to address the risks posed by such systemically important financial institutions, and if “properly implemented,” the Dodd-Frank overhaul legislation “might assist in reining in the pernicious threat to financial stability,” Fisher said.
Banks deemed too big to fail must hold as much as 2.5 percentage points in additional capital as part of efforts to prevent another financial crisis, global regulators said in June. The additional capital buffers will range from 1 percentage point to 2.5 percentage points, the Basel Committee on Banking Supervision said.
U.S. regulators are also required under the Dodd-Frank financial overhaul legislation to impose heightened standards on the biggest U.S. banks to curtail systemic risk. Last month, MetLife Inc., the nation’s largest life insurer, said the Fed rejected its plan to increase its dividend and resume share purchases. The insurer said it will try to sell its banking businesses, thus reducing government oversight.
Fisher said the banking industry has “become more concentrated,” with five institutions’ assets comprising half the industry’s. The assets of the 10 biggest depository institutions make up 65 percent of the banking industry’s assets and comprise three quarters of our nation’s gross domestic product, he said.
“Sustaining too-big-to-fail-ism and maintaining the cocoon of protection of SIFIs is counterproductive, expensive and socially questionable,” Fisher said.
“Perhaps the financial equivalent of irreversible lap-band or gastric bypass surgery is the only way to treat the pathology of financial obesity, contain the relentless expansion of these banks and downsize them to manageable proportions.”
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