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Dallas Fed’s Fisher proposes restructuring of too big to fail institutions

Richard Fisher

Richard Fisher

Richard Fisher, the president of the Dallas Federal Reserve Bank who has long indicated that “too big to fail” remains a problem for the U.S., kept the debate alive during a Wednesday speech.

“I submit that these institutions, as a result of their privileged status, exact an unfair tax upon the American people,” Fisher said before the Committee for the Republic, an ad hoc group of Washington influentials who come together to discuss potential risks to the nation. “Moreover, they interfere with the transmission of monetary policy and inhibit the advancement of our nation’s economic prosperity.”

Fisher blamed too big to fail institutions for the financial crisis and the slow ensuing recovery.

“Previously thought of as islands of safety in a sea of risk, they became the enablers of a financial tsunami,” Fisher said. “Now that the storm has subsided, we submit that they are a key reason accommodative monetary policy and government policies have failed to adequately affect the economic recovery…Put simply, sick banks don’t lend. Sick—seriously undercapitalized—megabanks stopped their lending and capital market activities during the crisis and economic recovery. They brought economic growth to a standstill and spread their sickness to the rest of the banking system.”

Fisher said that while Dodd-Frank was intended to end too big to fail, the legislation has not gone far enough.

“We submit that, in the short run, parts of Dodd-Frank have exacerbated weak economic growth by increasing regulatory uncertainty in key sectors of the U.S. economy,” Fisher said. “It has clearly benefited many lawyers and created new layers of bureaucracy. Despite its good intention, it has been counterproductive, working against solving the core problem it seeks to address.”

Additionally, Fisher said the Dallas Fed’s proposal offers an “about-turn” way to fix the flaws in Dodd-Frank.

“It fights unnecessary complexity with simplicity where appropriate,” Fisher said. “It eliminates much of the mumbo-jumbo, ineffective, costly complexity of Dodd-Frank. Of note, it would be especially helpful to non-TBTF banks that do not pose systemic or broad risk to the economy of the financial system. Our proposal would effectively level the playing field for all banking organizations in the country and provide the best protection for taxpaying citizens. In a nutshell, we recommend that TBTF financial institutions be restructured 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.”

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