“The government (FDIC) should not insure/guarantee the deposits of a bank that has less than 10% equity capital and another 10% to 20% subordinated debt/COCO’s (subordinated to the government’s guarantee), and the guarantee should be capped at $50 billion in deposits or so, per bank. (Today, it’s capped per bank at roughly 10% of total U.S. deposits! That’s way too high.) In this way, the government doesn’t mandate how big a bank may become, but the government’s risk exposure to any one big bank will be dramatically reduced…
…This still doesn’t mean that many or all of the smaller banks couldn’t fail at the same time (creating the same economic effect as a handful of big banks failing), if the government banking regulators force them all to be the same and make the same business decisions on lending and investment and liquidity. We need lot’s of different banks, with lot’s of different lending and investment strategies and we need regular bank failures (with the government backing insured depositors) that don’t all occur at the same time in the economic cycle. That’s what happens in most healthy, free-market capitalistic industries. Banks shouldn’t be any different.”, Mike Perry, former Chairman and CEO, IndyMac Bank
February 16, 2016, Binyamin Appelbaum, The New York Times
Fed’s Neel Kashkari Says Banks Are ‘Still Too Big to Fail’
Neel Kashkari at a California Republican Party event in 2014. On Tuesday he outlined a number of potential options for restraining large banks. Credit Stephen Lam/Reuters
WASHINGTON — During the 2008 financial crisis, Neel Kashkari worked tirelessly to save the nation’s largest banks. As a senior Treasury Department official in the George W. Bush and Obama administrations, he helped those banks grow larger than ever.
On Tuesday, he said it was time to think about breaking them up.
“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, delivering his first public speech as the new president of the Federal Reserve Bank of Minneapolis.
He described the threat of another crisis that might force the government to bail out large banks, as it did in 2008, as a rare instance of a clear and preventable problem.
“The question is whether we as a country have the courage to actually take action now,” he said.
Mr. Kashkari’s remarks caused a stir in Washington. Such views have become relatively 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.
“There are lines in your speech I can imagine a Bernie Sanders or Elizabeth Warren saying,” David Wessel, a former economics editor at The Wall Street Journal who moderated the Brookings event, told Mr. Kashkari during a panel discussion after the speech. “It’s not what one expects from a Goldman Sachs Republican.”
Mr. Kashkari, who joined the Minneapolis Fed in January after a postcrisis stint at the investment management firm Pimco and an unsuccessful run for governor of California, responded that he was calling things as he saw them. He said his views on financial regulation were shaped by the crisis, convincing him that strong, simple safeguards are the most sensible.
“If I’m not willing to stand up and share my concerns, then I wouldn’t be doing my job,” he said.
Other Fed officials are divided over the adequacy of postcrisis reforms. 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 after the speech that he had greater confidence than Mr. Kashkari in the 2010 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,” he said.
Mr. Kashkari said the cost of large crises underscored the importance of minimizing risk. “It’s not simply the cost of the bailout,” he said. “It’s the economic damage that’s inflicted across society.”
He said the Minneapolis Fed would begin a research effort to consider “more transformational measures” the government could pursue, and that he hoped to publish a proposal by the end of the year. Asked by reporters whether he had consulted the Fed’s chairwoman, Janet L. Yellen, or other officials, he responded, “I’m looking forward to getting their feedback.”
Mr. Kashkari outlined a number of potential options for restraining large banks, although he emphasized that the list was not intended to be comprehensive.
The first and most familiar is forcing large banks to break into smaller pieces, the approach favored by Mr. Sanders, who released a statement on Tuesday saying he was “delighted” by the speech.
Big banks argue they play a unique role in the global economy, and that foreign rivals would take up the slack. They also say big banks are stronger in some ways, and that regulations are adequate.
“Breaking up the U.S.-based global financial institutions would ensure that one of the United States’ most competitive global industries serving companies small and large is turned over to banks based outside the United States,” said John Dearie, acting chief executive of the Financial Services Forum, which represents the interests of large financial firms.
Alternatively, the government could limit risk-taking by increasing the share of funding banks must raise in the form of capital rather than borrowed money. Mr. Kashkari compared this to the safeguards imposed on nuclear power plants, where 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 preventing risk-taking by banks will shift activity to less regulated sectors.
Mr. Kashkari said that limiting the risks posed by large banks could allow the government to ease regulation of smaller banks. He also took a pre-emptive shot at the banking industry, noting the “endless objections” its lobbyists have raised to proposals for stronger regulation.
“We need to move before we as a society have forgotten the lessons of ’08,” he said.
A version of this article appears in print on February 17, 2016, on page B1 of the New York edition with the headline: Federal Reserve Executive Says Banks ‘Are Still Too Big to Fail’.