NEW YORK – Calling for a break up of too big to fail firms, Federal Reserve Bank of Dallas President and CEO Richard W. Fisher said these institutions impact the Fed’s monetary policy, according to the Bank’s 2011 Annual Report essay.
In an introductory letter to the essay, Fisher says the Dodd-Frank Act, which aims to end too big to fail (TBTF), may actually perpetuate a dangerous trend of increasing banking industry concentration.
The 10 largest U.S. banks now hold 61% of banking industry assets, compared with 26% 20 years ago.
"It is imperative that we end TBTF," Fisher writes. "In my view, downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the appropriate policy response."
In addition to remaining a threat to financial stability, TBTF banks significantly hamper the Federal Reserve's ability to properly conduct monetary policy, Fisher notes.
TBTF remains a danger to the financial system, according to essay author Harvey Rosenblum, Dallas Fed executive vice president and director of research.
Dodd-Frank's new resolution procedures may not be adequate to handle a large-scale financial crisis, Rosenblum says.
"A nightmare scenario of several big banks requiring attention might still overwhelm even the most far-reaching regulatory scheme," Rosenblum writes. "In all likelihood, TBTF could again become TMTF—too many to fail, as happened in 2008."
The two challenges facing the U.S. economy in 2012 and beyond--fixing the financial system and ensuring taxpayers won't be on the hook for another massive bailout--both require dealing with the threat posed by too big to fail, he states.
The definitive solution--breaking up the nation's biggest banks into smaller units--won't be easy, Rosenblum says. There are thorny issues surrounding how to go about breaking up the big banks, and determining the level of concentration considered safe will be difficult.
Though taking apart the big banks will have costs, it is still the least costly alternative, Rosenblum asserts. A system with more banks, none of them big enough to jeopardize the overall economy, will give the United States a better chance at managing future issues in financial markets.
"The ultimate destination--an economy relatively free from financial crises--won't be reached until we have the fortitude to break up the giant banks," he writes.