Fed’s Fisher: Break Up ‘Too Dangerous to Permit’ Banking Giants

U.S. banking giants should be “downsized” into institutions that can be prudently managed, ending future bailouts before “bankers lose their memory of the recent crisis,” said Richard Fisher, president of the Federal Reserve Bank of Dallas, in the text of a speech given today in New York.
Using medical analogies, Fisher said “too big to fail” institutions, should undergo “the financial equivalent of irreversible lap-band or gastric bypass surgery” to treat their “obesity.”
Fisher said half of the banking industry’s assets are now “on the books of five institutions,” with their combined assets equal to about 58 percent of the nation’s gross domestic product (GDP). The combined assets of the 10 largest depository institutions equate to 65 percent of the banking industry’s assets and 75 percent of GDP, he said.
The Fed official said financial reform legislation – known as the Dodd-Frank Act – might assist in reining in the mega banks.  With the reform, federal regulators now have the authority to unwind failing financial companies that are deemed as posing a threat to the U.S. But that determination may come too late by a designated oversight council, possibly after the economy has been affected by a failing behemoth.
“Progress is being made in the direction of treating the pathology of SIFIs (systemically important financial institutions), and the detailing of enhanced prudential standards governing their behavior,” Fisher said. “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.”
Fisher said he favors the stance of international regulators. Banks considered “too big to fail” must hold as much as 2.5 percentage points in additional capital as part of a global attempt at preventing another financial crisis, according to the Basel Committee on Banking Supervision, global regulators who met in June.  Additional capital requirements would range from 1 percentage point to 2.5 percentage points, the regulators said.
“Ideally, we should rely on market forces to work not only in good times, but also in times of difficulties,” Fisher said. “Ultimately, we should move to end too big to fail and the apparatus of bailouts, and do so well before bankers lose their memory of the recent crisis and embark on another round of excessive risk taking.”

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