Federal Reserve’s Kashkari Says Banks ‘Still Too Big to Fail’
By BINYAMIN APPELBAUMFEB. 16, 2016
WASHINGTON — A top architect of the 2008 federal bailout of the financial industry said on Tuesday that the government had not done enough to prevent a repeat.
- Neel Kashkari, a Treasury Department official in the George W. Bush and Obama administrations and now president of the Federal Reserve Bank of Minneapolis, said it was time to think about measures including breaking up the largest banks.
“I believe the biggest banks are still too big to fail and continue to pose a significant, ongoing risk to our economy,”
Mr. Kashkari said at the Brookings Institution.
The speech caused a stir in Washington. Such views are common at both ends of the political spectrum – providing fuel for the presidential campaigns of Senator Bernie Sanders, Democrat of Vermont, and Donald Trump, a Republican – but Mr. Kashkari is a moderate Republican and a former employee of Goldman Sachs.
It was also Mr. Kashkari’s first speech in his new job, which he began in January.
“There are lines in your speech I can imagine a Bernie Sanders or Elizabeth Warren saying,” David Wessel, a former journalist who moderated the Brookings event, told Mr. Kashkari during a panel discussion after the speech. “It’s not what one expects.”
Mr. Kashkari responded that he was calling things as he saw them.
“If I’m not wiling to stand up and share my concerns, then I wouldn’t be doing my job,” he said.
Mr. Kashkari said that the Minneapolis Fed would begin
a research effort to consider “more transformational measures” the government could pursue.
The first and most familiar option is forcing large banks to break apart, the approach favored by Mr. Sanders. Opponents argue that large banks are actually stronger in some ways, and that they play an important economic role.
A second possibility, Mr. Kashkari said, would be to greatly reduce the ability of banks to borrow money by increasing the share of funding they must raise in the form of capital. He compared this to the safeguards imposed on nuclear power plants, whose failure is regarded as unacceptable. Anat R. Admati, a Stanford finance professor, is
a leading proponent of this approach.
A third, broader approach would impose a tax on borrowing throughout the financial system, reducing risk-taking not just by banks but a wide range of other financial intermediaries. The role of banks in the financial system has declined over time, and many experts regard the rest of the financial system, relatively less regulated, as a more likely source of future crises.
Critics of both the second and third approaches argue that economic growth requires risk-taking, and that preventing risk-taking by some intermediaries will simply shift activity to less-regulated companies.
Mr. Kashkari’s bleak assessment is not shared by some other Fed officials.
Eric S. Rosengren, president of the Federal Reserve Bank of Boston and an influential voice on regulatory issues, said in
a recent speech that the government had made “substantial progress.” He said new regulation had reduced both the probability and the cost of a large-bank failure.
Donald L. Kohn, who worked with Mr. Kashkari during the crisis as the Fed’s vice chairman, said that he did not share Mr. Kashkari’s pessimism.
Congress responded to the crisis by passing the Dodd-Frank Act, which grants regulators new powers to constrain and, if necessary, dismantle large banks.
“I think the new regime, once it’s fully in place, probably will work,” Mr. Kohn said.
Mr. Kashkari, in response, emphasized that the potential cost of large crises underscored the importance of minimizing risk.
“It’s not simply the cost of the bailout,” Mr. Kashkari said. “It’s the economic damage that’s inflicted across society.”
http://www.nytimes.com/2016/02/17/business/dealbook/federal-reserves-kashkari-says-banks-still-too-big-to-fail.html?_r=0
