Fed President: Dodd-Frank Made 'Too Big To Fail' An Even Bigger Problem

LOS ANGELES, CA - OCTOBER 6:  Protesters look out a window as they occupy the lobby of a Bank of America before being arreste
LOS ANGELES, CA - OCTOBER 6: Protesters look out a window as they occupy the lobby of a Bank of America before being arrested by police on October 6, 2011 in Los Angeles, California. The demonstrators are marching to major bank offices to protest the role of Wall Street banks in the federal budget crisis and in solidarity with protesters in New York and other US cities. (Photo by David McNew/Getty Images)

After spending the last few years taking a wait-and-see approach to financial reform, several banking regulators in the U.S. and Europe kicked off 2013 by putting "too big to fail" banks firmly in their crosshairs. These regulators suggest rules devised since the financial crisis to curb the risk posed by such institutions have been a failure, and they are now willing to lobby for the break-up of the big banks.

In a speech at the National Press Club in Washington Wednesday, Federal Reserve Bank of Dallas President Richard Fisher spoke of "the injustice of being held hostage to large financial institutions considered too big to fail" and suggested those banks "be restructured into multiple business entities" through government action.

Such action, Fisher explained, is necessary given the ineffectiveness of current legislation in dealing with the society-wide risks big banks can pose.

"Dodd–Frank has not done enough to corral 'too big to fail' banks and, on balance, the act has made things worse, not better," Fisher said of the 2010 financial reform law. "There should be more than the present two solutions: bailout or the end-of-the-economic-world-as-we-have-known-it. Both choices are unacceptable."

Fisher, a Democrat who sits on the Federal Reserve's powerful rate-setting committee, has previously addressed the unwieldy size of the largest financial institutions, calling their immensity a nuisance to the central bank and a distortion of the pathways the Fed uses to stimulate the economy. His most recent speech, however, was a call to break up the big banks not because of a technicality of monetary policy, but as a question of basic fairness.

The speech even took on the mantle of defending the 99 percent, or as Fisher put it, the "99.8 percent of the banking organizations in America" that are disadvantaged by the implicit government guarantees given to the biggest banks.

Despite the sharp turn in rhetoric, Fisher is by no means a voice in the wilderness among bank regulators. Across the Atlantic, and just a few hours after Fisher delivered his speech, Andrew Haldane, executive director for financial stability at the Bank of England, posted a commentary to the policy blog VoxEU arguing “too-big-to-fail is far from gone” and that “it is even more important it is not forgotten.”

While his post was more conservative than Fisher’s battle cry to bust up the megabanks, Haldane similarly argued that not enough action has been taken to address the concentration of the financial system. He pointed to measures that fine banks for exceeding a certain size, force large institutions to adopt a living will and segregate banks' commercial and trading units as examples of enacted regulations that have fallen short.

“One solution might lie in strengthening these proposals,” Haldane suggested.

Though less vocal than those in the U.S. and the U.K., regulators in the European Union also appear to be working behind the scenes to pressure big banks.

Early Tuesday, Bloomberg News reported Germany’s financial regulator has quietly asked Deutsche Bank, that country’s biggest bank, for a report detailing what a split of the financier’s consumer banking and trading arms would look like.

Back in the U.S., it's not clear how much urgency proposals to break up the big banks will see. The current vice-chairman of the Federal Deposit Insurance Corporation, Thomas Hoenig, has been among the most ardent advocates of forcing banks down in size, saying his agency’s safety net should be forbidden from insuring the riskier parts of banking. But despite Hoenig's push to keep this proposal alive, his agency has done little to implement it.

To hear Fisher tell it, the lack of progress is not a question of regulators not knowing what to do. "The remedy is obvious," he said last week. "End 'too big to fail' now."



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