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Dallas Fed report advocates big bank break-up

Harvey Rosenblum

An essay from the Dallas Federal Reserve Bank’s annual report, endorsed by bank President Richard W. Fisher, charges that a handful of “too big to fail” banks are still standing in the path of economic recovery.

Harvey Rosenblum, the head of the Dallas central bank’s research department, writes that these financial giants have “increased oligopoly power” and “remain difficult to control because they have the lawyers and the money to resist the pressures of federal regulation,” according to The Bulletin.

Rosenblum also said that the bad behavior of banks leading up to the 2008 financial crisis and the reward of massive bailouts for that behavior has left “a residue of distrust for the government, the banking system, the Fed and capitalism itself,” The Bulletin reports.

Regarding the 2010 Dodd-Frank’s ability to dissolve these massive institutions, Rosenblum writes, “For all its bluster, Dodd-Frank leaves [“too big to fail”] entrenched,” according to The Bulletin.

Rosenblum said that the Dallas Federal Reserve’s position on the “living wills” of banks – essentially an emergency plan that details how the bank could exit the market using as little taxpayer money as possible – remains skeptical.

“We know under the current structure that the government would be called on once again,” Fisher said, The Bulletin reports.

Rosenblum explained that in order to safely handle another bank bailout without causing market disruptions, that institution would essentially have to have few business connections to other banks and companies. Rosenblum said that should there be another financial crisis, it would be very similar to that in 2008 with “too many to fail.”

To complicate matters, Rosenblum said, if another financial crisis were to occur, the decision to liquidate and bail out the bank no longer rests with the Federal Reserve but with the upper administration, including the U.S. Treasury and president. Rosenblum said that these flaws contribute to an already shaky financial system.

“Monetary policy cannot be effective when a major portion of the banking system is undercapitalized,” Rosenblum said, The Bulletin reports. “Many of the biggest banks have sputtered, their balance sheets still clogged with toxic assets accumulated in the boom years.”

The Dallas Federal Reserve advocates one solution: “The ultimate solution for [“too big to fail”]—breaking up the nation’s biggest banks into smaller units.”

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