US Federal Reserve Bank of Dallas President Richard Fisher said the government should break up the biggest US banks rather than allow them to hold a “too big to fail” advantage over smaller firms.
The 12 largest financial institutions hold almost 70 percent of the assets in the nation’s banking system and profit from an unfair implicit guarantee that the government would bail them out, Fisher said on Saturday in a speech at the Conservative Political Action Conference in National Harbor, Maryland.
The biggest banks enjoy a “significant” subsidy, enabling them “to grow larger and riskier,” he said.
“These institutions operate under a privileged status,” Fisher said. “They represent not only a threat to financial stability, but to fair and open competition.”
The biggest banks came under scrutiny yesterday at a Senate hearing on JPMorgan Chase & Co, which hid trading losses, according to a report by the US Senate’s Permanent Subcommittee on Investigations.
The New York-based firm under chief executive officer Jamie Dimon lost more than US$6.2 billion last year in a credit derivatives bet by Bruno Iksil, known as the “London Whale.”
Fisher said in a phone interview with Bloomberg News that his proposal “will not lead to the denial of credit for US corporations.”
The cost from big banks “far exceeds the benefits,” and the US does not need “to have the largest banks in the world to compete,” Fisher said after his speech.
“The point is to have healthy banks,” he said. “The point is that the taxpayer is not subjected again to the kind of losses or economic disruptions that they face from having concentrated institutions.”
Fisher, who will vote next year on the Federal Open Market Committee, does not play a direct role at the Fed on national financial regulation. That responsibility belongs to Daniel Tarullo, the Fed governor in charge of financial regulation and bank oversight.
All banks should be subject to a bankruptcy process, Fisher said in his speech.
Customers and creditors of non-bank affiliates should sign disclosures accepting “that there is no government guarantee — ever — backstopping their investment,” he said.
“Addressing institutional size is vital to maintaining a credible threat of failure,” Fisher said. “Without fear of failure, these banks and their counterparties can take excessive risks.”
The Dallas Fed will release a new essay on “too big to fail” banks next week, along with responses to questions and criticisms it has received about the proposal, he said.
Fisher’s speech echoed his comments in a March 10 Wall Street Journal opinion piece co-written with Harvey Rosenblum, research director at the reserve bank.
Their plan would cap assets at divisions of the largest financial firms backed by federal deposit insurance at about US$250 billion and wall off investment banking from traditional lending, Rosenblum said in a Bloomberg News interview this week.
That could force JPMorgan and Bank of America Corp to shrink their US consumer and commercial lending units by more than half.