How to Cut Megabanks Down to Size

Richard W. FisherIt is a prevailing myth in Washington: big bailouts are over for good. Never again, the line goes, could giant financial institutions imperil nation’s economy. This is nonsense, of course. Whatever regulators and lawmakers say, the Dodd-Frank financial overhaul lacks any guarantee the taxpayers won’t have to come to rescue again. So it was refreshing to hear a member of Federal Reserve Board debunk bailouts-are-gone theory last week. The official was Richard Fisher, the president of the Federal Reserve Bank of Dallas and a longstanding truth-teller about too-big-to-fail banks. On the last Wednesday, in a speech in Washington, Fisher laid out compelling proposal for shrinking financial giants in order to protect taxpayers. He suggested that megabanks be chopped into pieces, so that no one of them could endanger financial system if it ran into trouble. That may sound like a return to the Glass-Steagall Act, the Depression-era law that separated investment banking and commercial banking until it was dismantled in 1999. But Mr. Fisher’s plan is more sophisticated than Glass-Steagall, in that it recognizes how complex big financial institutions have become. Glass-Steagall concerned only the old-school banking businesses, making loans, and Wall Street businesses, like trading stocks. Today’s financial behemoths are in so many different businesses that a top-to-bottom restructuring is required. Why? Fisher argued megabanks not only threaten taxpayers with bailouts, but that their continuing failure to lend is also thwarting Fed’s efforts to jump-start economy by keeping interest rates low. “I submit that these institutions, as a result of their privileged status, exact an unfair tax upon American people,” told his audience. “Moreover, they interfere with the transmission of monetary policy and inhibit advancement of our nation’s economic prosperity.” The smaller institutions, by contrast, have continued to lend in the post-crisis years, especially to the kinds of modest-size businesses create so many jobs across the country. According to figures compiled by Mr. Fisher’s colleagues at Dallas Fed, community banks, defined as those with no more than $10 billion in assets, hold less than one-fifth of the nation’s banking assets. Nevertheless, they hold more than half of the industry’s small-business loans. Huge banks must be restructured and their access to the safety net scaled back, Mr. Fisher said, because neither regulators nor the market participants have proved effective in monitoring the risks at these institutions. The manic years before credit crisis proved regulators can’t police financial institutions appropriately. And while market discipline has worked to keep smaller institutions on straight and narrow, it has been ineffective with megabanks, Mr. Fisher said. He noted, for example, community banks typically have a few large shareholders scrutinizing risks in their operations. Too-big-to-fail institutions, with millions of disparate shareholders, don’t benefit from this kind of concentrated policing mechanism. Big banks’ creditors, bond holders, don’t impose discipline, either. They know they will be protected by a taxpayer rescue should a large institution teeter (…..)



Acerca de ignaciocovelo
Consultor Internacional


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