Politics

Top Financial Regulator Might Actually Break Up ‘Too Big To Fail’ Banks

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Neel Kashkari

The man who helped the federal government bail out large banks during the 2008 financial crisis says he hopes to use his new position as president of the Federal Reserve Bank of Minneapolis to regulate them out of existence.

During a talk today at the Brookings Institution, Neel Kashkari, who rose to national prominence in 2008 as manager of the U.S. Treasury Department’s $700 billion Troubled Asset Relief Program, said, “I believe the biggest banks are still too big to fail and continue to pose a significant, ongoing risk to our economy.”

During today’s talk, Kashkari applauded the 2010 Dodd-Frank reform, but said he doesn’t believe the legislation went far enough to control banks that are “too big to fail” or TBTF.

“Now is the right time for Congress to consider going further than Dodd-Frank with bold, transformational solutions to solve this problem once and for all,” Kashkari said. “The Federal Reserve Bank of Minneapolis is launching a major initiative to develop an actionable plan to end TBTF, and we will deliver our plan to the public by the end of the year. Ultimately Congress must decide whether such a transformational restructuring of our financial system is justified in order to mitigate the ongoing risks posed by large banks.”

Kashkari put forth three possible solutions to the TBTF problem, all of which would drastically reform the banking system and cut into financial institutions’ profit margins. One strategy involves breaking up large banks into smaller, less connected, less important entities. Alternatively, the government could essentially turn large banks into public utilities by forcing them to hold so much capital that they virtually can’t fail, with regulation akin to that of a nuclear power plant. Or the feds could tax leverage throughout the financial system to reduce systemic risks wherever they lie.

In Kashkari’s view, those reforms are necessary because despite the Dodd-Frank reforms, the country’s largest banks are still so large that the failure of one of them could trigger a macroeconomic collapse.

Kashkari’s acknowledgement of the problem and his desire to work toward a solution drew praise from Democratic presidential hopeful and Vermont Senator Bernie Sanders, who has made his desire to break up so-called TBTF banks a centerpiece of his presidential campaign.

“I am delighted that the new president of the Minneapolis Federal Reserve believes that we need to break up too big to fail banks,” Sanders said in a statement.

“If a bank is too big to fail, it is too big to exist. When it comes to Wall Street reform that must be our bottom line. The risk of another bailout is too great, and the economic and political power of a handful of huge financial institutions is simply too large,” he continued.

“We need a banking system that is part of the productive economy – making loans at affordable rates to small- and medium-sized businesses so that we can create decent-paying jobs. Wall Street cannot continue to be an island unto itself, gambling trillions in risky financial instruments, making huge profits, assured that, if their schemes fail, the taxpayers will be there to bail them out.”

Hillary Clinton, Sanders’ sole remaining competition for the Democratic presidential nod (as of now), has also called for breaking up TBTF banks, but her plan doesn’t go as far toward changing the way large financial institutions do business.