The Federal Reserve's new vice chair all but dismissed the idea of breaking up the largest U.S. banks, saying on Thursday it is unclear that such a complex task would help stabilize the country's financial system.
In his most detailed speech on financial regulation since becoming the Fed's No. 2 official, Stanley Fischer also floated the idea of adding a financial stability mandate to all of the U.S. regulators under the umbrella of the Financial Stability Oversight Council (FSOC), a coordinating committee.
Fischer, a former governor of the Bank of Israel, was careful to hedge his comments on what more was left for regulators to do following the 2007-2009 financial crisis, borrowing heavily from published papers on the politically sensitive topic.
Addressing the lingering problem of too-big-to-fail banks — those that benefit from the public assumption that the government will do whatever is needed to protect them in times of crisis — Fischer said the Fed and other regulators must not become complacent, because more work is necessary.
But he said it is "not clear" that breaking up the largest banks would end the need for future government bailouts, pointing out that bankrupt investment bank Lehman Brothers was not a U.S. financial giant and arguing that the savings and loan crisis of the 1980s and '90s was due to small firms "behaving unwisely."
"In short, actively breaking up the largest banks would be a very complex task, with uncertain payoff," Fischer said in a speech to the National Bureau of Economic Research.
Fischer, who was sworn in as Fed vice chair last month, said that big, complex banks are less likely to be stable the more they reply on interest-rate-sensitive, short-term funding.
Some politicians and even regulators, such as the president of the Dallas Fed, Richard Fisher, have urged new rules that would in effect shrink or break up too-big-to-fail banks.
But in general the Fed and other regulators have shied away from the idea, pointing instead to new rules that require banks to reduce leverage, maintain a supply of assets they could sell quickly, and stop making risky trades with their own money.
WIDER STABILITY MANDATE
A widely respected economist with extensive policymaking experience, Fischer is expected to play an influential role in helping to shape U.S. monetary and regulatory policy, and could prove a powerful ally of Fed Chair Janet Yellen.
Yellen last week said that regulation was the primary tool to prevent financial instabilities, with monetary policy a distant backup. Fischer, while careful to avoid addressing the question head on, cited some limitations in using targeted rules to deal with imbalances.
An unfettered bubble in the U.S. mortgage market last decade led to the financial crisis and global recession, a grim period that saw banks collapse and governments and central banks scramble to prevent a new Great Depression.
Fischer praised the progress since then in making Wall Street safer, but added: "Unfortunately, we are still dealing with the consequences of the collapse and the steps necessary to deal with it."
Addressing the FSOC, which was formed to take a holistic view of financial stability, Fischer said reforms suggested by former Fed Vice Chair Donald Kohn warrant "serious" examination. He suggested that some U.S. agencies should also have a mandate to consider how their own regulatory bailiwick affects the stability of the entire financial system.
"It may well be that adding a financial stability mandate to the overall mandates of all financial regulatory bodies, and perhaps other changes that would give more authority to a reformed FSOC, would contribute to increasing financial and economic stability," Fischer said.
The FSOC brings together nine U.S. agencies, among which are the Securities and Exchange Commission and the Commodity Futures Trading Commission, both of which, for example, do not have such a financial stability mandate.
Fischer did not comment directly on monetary policy or economic conditions.
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