Calls by the newest Federal Reserve regional president to end “too big to fail” banking practices are likely headed nowhere in terms of policy changes, but could at least shape the discussion for the next year, experts say.
Minneapolis Federal Reserve President Neel Kashkari, who helped oversee the Troubled Asset Relief Program from 2008 to 2009, said in a speech at the Brookings Institute on Feb. 16 that his office intends to roll out an actionable plan to break up big banks. He said he would specifically direct his staff to begin collecting input on the issue.
“Congress created the Federal Reserve System to help prevent financial crises from inflicting widespread damage to the U.S. economy. Doing everything we can to address the systemic risks posed by large banks will be an important step to fulfilling that mission,” Kashkari said. “Seven years after the crisis, I believe it is now time to move forward and end 'too big to fail.' "
But Jennifer Dlugosz, a former economist for the Federal Reserve’s board of governors and a professor of economics at Washington University in St. Louis, said Kashkari’s influence likely won’t extend further than a report presented later to the board and the Federal Open Market Committee. The FOMC comprises Fed presidents who vote on economic policy, such as interest rates. Specific capital requirements for banks, Dlugosz said, are not only subject to the votes by the Fed, but also subject to guidelines by the Financial Crisis Inquiry Commission.
“There's even some degree of international coordination, because any one country usually worries that if they impose stricter requirements than other countries, then their banks are not going to be competitive,” Dlugosz told AMI Newswire. “So even beyond the Fed, there ends up being a whole bunch of other parties that have a say in financial regulations.”
The latest numbers from Federal Deposit Insurance Corp. show that banks with greater than $1 trillion in assets lost roughly 1 percent in the last quarter of 2015, while banks holding between $5 billion and $999 billion grew almost 4 percent, adding more than $150 trillion in assets collectively.
“New regulations requiring dramatically larger reserves and significantly decreased risk were enacted to end ‘too big to fail’ and bailouts,” Tim Pawlenty, president and CEO of the Financial Services Roundtable, said in a statement provided to AMI Newswire. (The Roundtable represents the nation’s largest banks.) “Those regulations should be finalized and their impact fully studied before policymakers can credibly call for them to be repealed and replaced with actions that could put American banks at a major global disadvantage and have other unintended consequences.”
Kashkari is no stranger to politics, having launched an unsuccessful bid for governor of California in 2014. His comments come as rhetoric about bank regulation heats up on the campaign trail, particularly among Democrats. Sen. Bernie Sanders on Tuesday applauded Kashkari's comments, reiterating a stance against Wall Street that has served as a cornerstone of his bid for the Democratic presidential nomination.
“If a bank is too big to fail, it is too big to exist,” Sanders said in a statement. “The risk of another bailout is too great, and the economic and political power of a handful of huge financial institutions is simply too large.”
Democrats, however, are not the only ones discussing changes to large-bank policy. Although their tactics differ, many Republican presidential candidates also are taking up the subject. During a Republican debate in November, Florida Sen. Marco Rubio specifically attacked the Dodd-Frank Act, the 2010 legislation passed in the wake of the financial crisis, saying that requirements in the law solidified the “too big to fail” status of banks as "Systemically Important Financial Institutions.”
“These banks go around bragging about it," Rubio said in the debate. "They say with a wink and a nod 'we are so big and so important that if we get in trouble, the government has to bail us out' - this is an outrage and we have to repeal Dodd-Frank."
Although the next president - who would be inaugurated around the time of the next expected meeting of the FOMC - might influence policy somewhat, he or she could do little without broader approval from Congress, Dlugosz told AMI Newswire.
The FOMC is expected to meet next January.