NEW YORK – Too big to fail depository institutions should be broken up using an international accord, Federal Reserve Bank of Dallas President and CEO Richard W. Fisher said Tuesday.
“In my view, downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the appropriate policy response,” he told Columbia University’s Politics and Business Club, according to prepared remarks released by the Fed. “Then, creative destruction can work its wonders in the financial sector, just as it does elsewhere in our economy.”
Having systemically important financial institutions “is counterproductive, expensive and socially questionable.”
Regulators, he charged, “have failed in their mission” to “secure capital structures at our largest financial institutions” and allow institutions that “betray” to be “free to fall.”
Small banks with problems are quickly “resolved” by regulators, usually disappearing, but large banks do not receive “equal treatment,” Fisher noted. “To be sure, some very large financial firms have ceased to exist, or have been through a corporate reorganization with some of the characteristics of a Chapter 11 bankruptcy. But these institutions deemed ‘too big to fail,’ and deemed to be ‘systemically’ important due to their size and complexity, were given preferential treatment. Many were absorbed by still larger financial institutions, thus perpetuating and exacerbating the phenomenon of too big to fail.”
Dodd-Frank is a large, complex bill, but much has yet to be done to implement it. “For all that it specifies to treat the unhealthy obesity and complexity of too-big-to-fails, Dodd–Frank has an Achilles heel. It states that in the disposition of assets, the FDIC shall ‘to the greatest extent practicable,’” act to mitigate potentially “serious adverse effects to the financial system,” but that “leaves plenty of wiggle room for fears of ‘cascading defaults’ and ‘catastrophic risk’ to perpetuate ‘exceptional and unique’ treatments.”
