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A proposal to end ‘TBTF’ banks

By Marcie Geffner · Bankrate.com
Wednesday, January 23, 2013
Posted: 5 pm ET

Should too-big-to-fail, or "TBTF," banks be subjected to more federal regulation or greater free market forces?

That question was behind a recent speech in which Richard W. Fisher, chief executive of the Federal Reserve Bank of Dallas, proposed an "about turn" in federal policy, shifting from the Dodd-Frank Act to restructuring megasized financial institutions.

Here are some excerpts:

The Dallas Fed's definition (of TBTF banks) is financial firms whose owners, managers and customers believe themselves to be exempt from the processesĀ of bankruptcy and creative destruction. Such firms capture the financial upside of their actions but largely avoid payment -- bankruptcy and closure -- for actions gone wrong. ... Such firms ... thus (are) more likely to take greater risks in search of profits, protected by the presumption that bankruptcy is a highly unlikely outcome.

As of third quarter 2012, there were approximately 5,600 commercial banking organizations in the U.S. The bulk of these -- roughly 5,500 -- were community banks with assets of less than $10 billion. ... Another group numbering nearly 70 banking organizations -- with assets of between $10 billion and $250 billion -- accounted for 1.2 percent of banks, while controlling 19 percent of industry assets. The remaining group, the megabanks -- with assets of between $250 billion and $2.3 trillion -- was made up of a mere 12 institutions, (which) are candidates to be considered TBTF because of the threat they could pose to the financial system and economy should one or more of them get into trouble.

(Our approach) calls for reshaping TBTF banking institutions into smaller, less-complex institutions that are: economically viable, profitable, competitively able to attract financial capital and talent, and of a size, complexity and scope that allows both regulatory and market discipline to restrain excessive risk taking. ... It calls first for rolling back the federal safety net to apply only to basic traditional commercial banking. Second, it calls for clarifying through simple understandable disclosures that the federal safety net applies only to the commercial bank and its customers and never ever to the customers of any other affiliated subsidiary or the holding company.

My team at the Dallas Fed and I are confident this simple treatment to the complex problem and risks posed by TBTF institutions would be the most effective treatment.

What do you think? Should megabanks be restructured into separate companies?

Follow me on Twitter: @marciegeff.

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1 Comment
Frank Keller
January 23, 2013 at 7:30 pm

The TBTF megafinancials were able to cause the US and world economy meltdown because of the TBTF attitude and lack of oversight . The kind of oversight rules and enforcement that the Republican's have fought every attempt to implement. This by a group that thinks of themselves as fiscal conservatives[at least while the Dems are in the Whitehouse ]. They had a general inability to say no to any of Jr's and Cheney's gross spending.The TBTF financial houses [they ceased to be just banks after they helped rewrite the rules in 1982 ] need real oversight reform [ with real enforcement ] and in some cases , to be broken up as was Ma Bell many years ago.