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Fisher: How to End 'Too-Big-To-Fail'
Watching the giant banks report plump 2012 profits made me think how it must rankle people who are struggling to find jobs. These banks exacerbated the financial collapse, got bailed out by the government because allowing them to fail probably would have made things worse, and now are riding high and showering their executives with multi-million-dollar bonuses. No wonder people resent Wall Street. But a proposal has been floated to shrink the safety net that government — aka taxpayers — will hold beneath these risk-taking behemoths. This proposal came one week ago in a speech given by Richard W. Fisher, president of the Federal Reserve Bank of Dallas. Fisher has been an outspoken critic of “too big to fail” banks since 2009, and he didn’t pull punches this time either: “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.” Fisher observed that 12 mega-banks (0.2% of 5,600 U.S. commercial banks) control 69% of the nation’s banking assets. Their sheer size insulates them from market and shareholder discipline. They are simply too sprawling for effective regulatory discipline. One reason is that in addition to their commercial banking operations, the giant bank holding companies have created thousands of subsidiaries engaged in nonbanking activities such as securities brokerage and insurance. The federal safety net has been implicitly extended to cover these nonbanking enterprises, too, Fisher says, and the Dodd-Frank reform law “has made things worse, not better.” The Dallas Fed’s proposal would restructure the too-big-to-fail banks into multiple business entities. “Only the resulting downsized commercial banking operations — and not shadow banking affiliates or the parent company — would benefit from the safety net of federal deposit insurance and access to the Federal Reserve’s discount window,” Fisher explained. He added that customers of these nonbanking affiliates should sign a form acknowledging that the business unit has no federal deposit insurance or other federal government protection or guarantees. Fisher is absolutely right on every major point he makes: We don’t want or need too-big-to-fail banks that can take excessive risks with impunity. The law that Congress passed to “reform Wall Street” doesn’t fix the problem. Restricting the safety net only to commercial banking will focus the taxpayers’ backstopping obligations to exactly where they should be. What’s not to like about this proposal? Wouldn’t this be a dandy vehicle for some old-fashioned bipartisan law making?