Monday, December 12, 2011

Dallas Fed chief: bust up TBTF banks

Richard Fisher, CEO of the Dallas branch of the Federal Reserve, gave a blistering speech a few weeks ago at Columbia University about TBTF (too big to fail) banks.  After the dust has settled from the financial crisis, we have fewer big banks that are all now much bigger than before the crisis.  Small and medium sized banks are routinely allowed to go belly up, so why not the big ones?  Fisher takes note of the traditional argument -- that the big banks are so tightly interconnected with each other that a failure at one bank could take down others. 

Fisher thinks that the increased capital requirements under Dodd-Frank will help some.  But he does not think it is enough:
Yet, in my view, there is only one fail-safe way to deal with too big to fail. I believe that too-big-to-fail banks are too-dangerous-to-permit.  As Mervyn King, head of the Bank of England, once said, “If some banks are thought to be too big to fail, then … they are too big.” I favor an international accord that would break up these institutions into more manageable size. More manageable not only for regulators, but also for the executives of these institutions. For there is scant chance that managers of $1 trillion or $2 trillion banking enterprises can possibly “know their customer,” follow time-honored principles of banking and fashion reliable risk management models for organizations as complex as these megabanks have become.
Now this is coming from a Fed branch president/CEO, not someone from Occupy Wall Street.  I wonder if any of our presidential candidates will pick up on this.

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