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Fed prez: Consider breaking up big banks

By Claes Bell · Bankrate.com
Tuesday, February 16, 2016
Posted: 4 pm ET

Neel Kashkari, newly installed president of the Minneapolis Federal Reserve Bank, wants to keep all options on the table for preventing a future banking crisis, including breaking up the big banks.

Citing his experience at the Treasury Department during the financial crisis, Kashkari on Tuesday expressed doubt that current regulations would be enough to prevent a future crisis.

"While significant progress has been made to strengthen the financial system, I believe the (Dodd-Frank Act) did not go far enough," Kashkari said. "I believe the biggest banks are still too big to fail and continue to pose an ongoing large risk to our economy."

Comparing large bank failures to nuclear power plant meltdowns, he said that given the "staggering" damage inflicted to society by megabank failures, he thinks Congress needs to consider more "transformational" changes to the financial system, such as:

  • Breaking up large banks into smaller, less connected, less important entities.
  • Turning large banks into public utilities by forcing them to hold so much capital that they virtually can't fail (with regulation akin to that of a nuclear power plant).
  • Taxing leverage throughout the financial system to reduce systemic risks wherever they lie.

Far from first

News of Kashkari's speech may trigger a backlash from banks, but the Minneapolis Fed president is far from the first high-profile figure to float some version of a megabank breakup.

In fact, he's at least the 3rd Federal Reserve bank president to lend some form of support to breaking up the big banks. Former Federal Reserve Bank of Kansas City president (and current FDIC vice chairman) Thomas Hoenig has also advocated for a breakup, as well as former Dallas Fed president Richard Fisher, who pitched breaking up the banks as "the key to economic prosperity and improved financial stability" in 2012.

Democratic presidential candidate Bernie Sanders has made busting up large banks a central plank in his platform, drawing criticism from his rival Hillary Clinton, media commentators and others.

Still pretty unlikely

While Kashkari's speech may add some legitimacy to calls for a radical reshaping of the banking system, such an outcome is still unlikely.

Regulators are still hoping that the "living wills" banks are crafting will be enough to shut down a failing megabank and prevent "spillover" into the larger economy.

"Before you say, 'Let's break up the big banks, let's use government to intervene in the private sector in a way that's pretty major,' that is taking a private entity and breaking it into different pieces, I think you have to convince me that what's been put in place won't work," said Donald Kohn, a senior fellow at the Brookings Institution and a former Fed governor, at a panel discussion that followed Kashkari's speech.

Even the less radical proposals Kashkari put on the table are unlikely to be considered by Congress. Lawmakers have shown little appetite for increasing government intervention in the financial sector, with many congressional leaders, including House Financial Services Committee Chairman Jeb Hensarling (R-Texas) advocating the full repeal of the more incremental Dodd-Frank Act.

"Ultimately, Congress must decide whether such a transformational restructuring of our financial system is justified in order to mitigate the ongoing risks posed by large banks," Kashkari acknowledged in his speech. And that doesn't look likely anytime soon.

What do you think? Should breaking up the big banks be on the table as a way to protect the economy?

Follow me on Twitter: @claesbell.

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2 Comments
Anasazi
February 16, 2016 at 9:16 pm

They should have been broken up long before the Great Recession. There is no economic justification for such megabanks. They are self-serving monoliths.