Big Bank Failures Need Punishment: Fed's Fisher
By Shanthi Bharatwaj - 05/01/12 - 12:49 PM EDT
NEW YORK (TheStreet) -- Dallas Federal Reserve President Richard Fisher -- a longtime critic of "Too-Big-To-Fail banks" and ultra-loose monetary policy-- says banks that require taxpayer assistance in the future will have to face harsh, non-negotiable consequences.
In a presentation building his case for breaking up the big banks on Tuesday, Fisher said taxpayer aid will be provided to banks with strings attached, such as requiring the removal of the CEO and top executive team, replacement of the board of directors and making all employment/compensation and bonus contracts "null and void."
He also said the top management team should be made to return any bonus compensation paid out in the two years prior to the bailout.
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Such harsh disincentives will discourage banks from seeking bailouts. Government aid will also be handed only to federally insured deposits. All creditors and counterparties of financial companies/entities other than federally insured deposit institutions should be "put on notice that there is no federal safety net covering their transactions. NONE," he wrote in his presentation.
Pointing out that the crisis had only increased the size of too-big-to-fail firms, thanks to assisted acquisitions of weaker banks, Fisher said the largest financial firms should be "last in line" to acquire assets of the failed institutions.
He added that the benefits of ending too-big-to-fail outweighed costs such as forgoing economies of scale and scope and the fact that a "one-stop shop" for financial services may become more difficult for the customer.
Other members of the Fed, including Richmond Fed President Jeffrey Lacker, Chicago Fed President Charles Evans and Governor Daniel Tarullo, have also more recently called for an end to TBTF.
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Critics have said the the Dodd Frank Act is yet to adequately address the problem of winding up banks that pose a systemic risk to the economy.
"Unfortunately, the Dodd-Frank Act has only reinforced the view that big and troubled banks will receive special government assistance," former Fed Governor Kevin Warsh said in a recent speech before Stanford Law School. "By sanctioning some list of too-big-to-fail firms -- and treating them different than the rest -- policy makers are signaling to markets that the government is vested in their survival."
In a press conference last week, Fed Chairman Ben Bernanke that regulators are attempting to eliminate some of the incentives to be a TBTF institution such as "tougher regulatory oversight, higher capital requirements, greater liquidity requirements, restrictions on interconnectedness etc- take away the benefits or force firms to internalize the costs of being large and complex."
The litmus test that will prove that regulators have been successful in ending too-big-to-fail would be that "the financial markets that lend to large firms base their bond spreads or what they are willing to pay for the stock of those firms on the risk-taking and business model of the firm and not on some anticipation of a government bailout," Bernanke said.
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Eight U.S. firms have been officially classified as systemically important financial institutions including Bank of America
, JPMorgan Chase
and Wells Fargo
--Written by Shanthi Bharatwaj in New York
>To contact the writer of this article, click here: Shanthi Bharatwaj
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