Dallas Fed president Richard Fisher provides peek at proposal to fix “too big to fail” megabanks

Richard Fisher, president of the Federal Reserve Bank of Dallas, today proposed breaking up “too big to fail” U.S. banks into multiple businesses and preserving the nation’s safety net programs only for commercial banks.
“Everyone and their sister knows that financial institutions deemed too big to fail were at the epicenter of the 2007-09 financial crisis,” according to a transcript of Fisher’s speech tonight to the Committee for the Republic Salon in Washington, D.C., that The Dallas Morning News received.

Dallas Fed president Richard Fisher

These megabanks stopped their lending and investment activities during the Great Recession and economic recovery, bringing “economic growth to a standstill,” Fisher said. He argued that the Dodd–Frank banking reform law has not done enough to harness too-big-to-fail banks and has increased regulatory uncertainty amid a weak economic recovery.
The Dallas Fed’s proposal offers an “ ‘about-turn’ and a way to mend the flaws in Dodd–Frank,” he said.
Fisher’s speech is a preview of a report the Dallas Fed plans to release tomorrow about how to handle “too big too fail” banks and how community banks are unfairly hurt by excessive regulation designed for their much larger peers.
Too-big-to-fail status describes giant banks that could pose a threat to the well-being nation’s financial system and economy if or more of them falters.
Fisher identified 12 U.S. banks — each with assets above $250 billion — as candidates for too-big-to-fail status. Together the 12 banks accounted for 0.2 percent of all U.S. banks but held 69 percent of industry assets as of Sept. 30.
The Dallas Fed’s proposal “eliminates much of the mumbo-jumbo, ineffective, costly complexity of Dodd–Frank,” Fisher said today. “Our proposal would relieve small banks of some unnecessary burdens arising from Dodd–Frank that unfairly penalize them. Our proposal would effectively level the playing field for all banking organizations in the country and provide the best protection for taxpaying citizens.”
Here are some highlights of the proposal, according to Fisher, with more details tomorrow:
– Restructure too-big-to-fail banks into smaller, less-complex institutions so risks can be effectively disciplined by regulators and market forces.
– Restrict federal deposit insurance to only commercial banks.
– Clarify that the federal safety net programs apply only to a commercial bank and its customers and not to customers of any affiliated subsidiary or the holding company.
— Limit the Federal Reserve’s discount window loans to only commercial banks — and no banking affiliates or a parent company.
– Require customers, creditors and counterparties of a banking affiliate and of the senior holding company to sign a simple disclosure statement acknowledging their unprotected status.
– Possibly add more restrictions (or bans) on the ability to move assets or liabilities from banking affiliate to banking affiliate within a holding company.
Fisher has spoken out or written about the too-big-to-fail issue since 2009.