WASHINGTON — Dallas Federal Reserve Bank President Richard Fisher Wednesday evening railed against what he says is the tyranny of large financial institutions, accusing them of limiting the full impact of measures intended to boost the economic recovery, and he put forward fixes to the Dodd-Frank Act that he believes has exacerbated the advantages enjoyed by behemoth banks.

"I submit that these institutions, as a result of their privileged status, exact an unfair tax upon the American people. Moreover, they interfere with the transmission of monetary policy and inhibit the advancement of our nation's economic prosperity," he said in remarks prepared for delivery at an event organized by the Committee for the Republic.

In the aftermath of the recession, Fisher added that too-big-to fail banks "are a key reason accommodative monetary policy and government policies have failed to adequately affect the economic recovery."

The Dodd-Frank Wall Street Reform Act was signed into law in 2010, a massive overhaul of the financial regulatory system that was intended to address weaknesses that resulted in the 2008 financial crisis.

However, Fisher argued that "Dodd-Frank has not done enough to corral TBTF banks and that, on balance, the act has made things worse, not better."

Instead, he said parts of the law have exacerbated the economy's weak performance by ramping up regulatory uncertainty in key sectors.

"Despite its good intention, it has been counterproductive, working against solving the core problem it seeks to address," he said.

Too-big-to fail banks, he said, should be reshaped in smaller, less-complex institutions with a size and complexity that allows both regulators and market discipline to restrain excessive risk taking.

The outspoken Dallas Fed chief offered up proposals to address the weaknesses in what he sees as a well-meaning but flawed law, in particular relieving small banks of burdens from Dodd-Frank that unfairly penalize them.

The Dallas Fed proposal first of all calls for limiting the federal safety net to only "basic, traditional commercial banking," he said. This would be followed by a clarification that the federal safety net applies only to the commercial bank and its customers and never ever to those of any other affiliated subsidiary or the holding company.

"The shadow banking activities of financial institutions must not receive taxpayer support," Fisher stressed.

Acknowledging that implementing reform on this scale might take many years — during which the seeds of another crisis might be sown — Fisher said too-big-to fail bank holding companies may need to be downsized and restructured so the commercial banking part of the holding company that is backed up by the safety net can be effectively disciplined by regulators and market forces.

"And there will likely have to be additional restrictions (or possibly prohibitions) on the ability to move assets or liabilities from a shadow banking affiliate to a banking affiliate within the holding company," he added.

The key to pushing these reforms through the system that has become used to federal support is to use as little government intervention as possible, Fisher said. He argued that this will realign incentives and make for a more competitive financial sector.

"To us, the remedy is obvious: end TBTF now. End TBTF by reintroducing market forces instead of complex rules, and in so doing, level the playing field for all banking institutions," he said.

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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