Regulators should break up financial institutions that are large enough to be considered too-big-to fail in order to reduce the risk to financial stability, according to Federal Reserve Bank of Dallas President Richard Fisher.
“I believe that too-big-to-fail banks are too-dangerous-to-permit,” Fisher said, according to Bloomberg.com. “Downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the appropriate policy response. Then, creative destruction can work its wonders in the financial sector, just as it does elsewhere in our economy.”
According to Fisher, the Dodd-Frank Act would assist in scaling back the size of large financial institutions if it is properly implemented.
Currently, banks that are considered too-big-to-fail are required to hold as much as 2.5 percentage points in additional capital in case of another financial crisis, as required by the Basel Committee on Banking Supervision, Bloomberg.com reports.
The Federal Reserve is already using its authority given to it by Dodd-Frank to impose heightened standards on the nation’s biggest banks, according to Bloomberg.com.
As a result, some financial institutions, including MetLife Inc., the nation’s largest life insurer, are selling parts of their businesses in order to avoid government over-regulation.
Fisher said he wants the banking industry to be more dispersed because more than half of the industry comprises of only five institutions’ assets.
“Sustaining too-big-to-fail-ism and maintaining the cocoon of protection of SIFIs is counterproductive, expensive and socially questionable,” Fisher said, according to Bloomberg.com. “Perhaps the financial equivalent of irreversible lap-band or gastric bypass surgery is the only way to treat the pathology of financial obesity, contain the relentless expansion of these banks and downsize them to manageable proportions.”