To Prevent Financial ‘Viruses,’ Dallas Fed President Calls For Breaking Up Big Banks

Dallas Federal Reserve President Richard Fisher

Dallas Federal Reserve President Richard Fisher

Last month, Kansas City Federal Reserve President Thomas Hoenig openly advocated for the “dismembering” of financial firms that are “too-big-to-fail.” He said that carving out the portions of a firm that are taking risks with taxpayer dollars is a “fair thing to consider.”

Many other economists and elected officials have also thrown their support to breaking up systemically risky financial firms, and today they were joined by Dallas Fed chief Richard Fisher. In a speech before the Council on Foreign Relations, Fisher said that “a truly effective restructuring of our regulatory regime will have to neutralize what I consider to be the greatest threat to our financial system’s stability — the so-called too-big-to-fail, or TBTF, banks”:

Given the danger these institutions pose to spreading debilitating viruses throughout the financial world, my preference is for a more prophylactic approach: an international accord to break up these institutions into ones of more manageable size — more manageable for both the executives of these institutions and their regulatory supervisors. I align myself closer to Paul Volcker in this argument and would say that if we have to do this unilaterally, we shouldAnd this should be done before the next financial crisis, because it surely cannot be done in the middle of a crisis.

Fisher has previously called huge megabanks “the blob that ate monetary policy,” saying that “the very existence of the blob of banks considered as too big to fail blocks, or seriously undermines, the mechanisms through which monetary policy influences the economy.”

As The Atlantic’s Daniel Indiviglio wrote, “breaking up systemically risky firms is the most direct way to address the too big to fail problem. It would be messy, but it’s also the only way we can have some certainty that firms can collapse without taking the entire economy down with them. It’s nice to see another Fed president join the cause, but unless others follow, it might not much matter.” Indeed, the tide in Congress seems to be moving away from even the more moderate provisions in the Volcker Rule, which would bar banks from trading for their own benefit with federally insured dollars, but stops short of explicitly breaking them up.

As James Kwak wrote, the current regulatory reform bill moving in the Senate is “a least-common-denominator reform package that leaves the basic financial system intact.” And while a robust resolution authority (like that in the regulatory reform package passed by the House last year) will go a long way toward preventing a financial firm’s collapse from costing taxpayers money, it’s still legitimate to ask why we would allow financial firms to exist that we know, from previous experience, are big enough to threaten the entire economy.