Big Banks – Too Dangerous to Permit

Richard Fisher-President of the Dallas Federal Reserve Bank, has declared, “I believe that too-big-to-fail banks are too- dangerous-to-permit.”  He is not the only one saying this.


Mr. Fisher went on to propose that “Downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the appropriate policy response. “  Tom Hoeing, recently retired President of the Federal Reserve Bank of Kansas City, believes that “America’s innovative dynamism is related to thousands of community and regional banks attuned to local needs.”  He thinks the biggest threat to the economy is the existence of too-big-to-fail financial institutions.


Even former Republican Presidential candidate, Jon Huntsman, wrote a blistering op ed column in the Wall Street Journal October 2011: Too Big to Fail is Simply Too Big.  He would impose fees on banks that exceed a certain percentage of the GDP.  This would encourage institutions to downsize.


Congress passed Dodd-Frank in 2010 to address the causes of the financial crisis and the threat of Too-Big-To-Fail (TBTF) banks.  Dodd-Frank has done much that needed done in oversight of finance.  It has also gone too far.  Community and even regional banks do not have the staff and lawyers to deal with the increased regulation that reaches them.  Even Barney Frank D-MA has said, “overloading the circuits isn’t a good idea.”  The Financial Stability Oversight Council “has enough to do regulating the institutions that are clearly meant to be regulated – the large banks.”


Regulate the big.  Liberate the small to innovate and grow.


As a congressman I would focus on four points that are increasingly being emphasized by those working to rein in TBTF banks:

– Limit all government guarantees (FDIC, etc.) to deposit taking activities.  Prevent government backed deposits from underwriting any of the banks activities

– Counterparties must sign a declaration that if their transactions fail, they will not be bailed out with taxpayer money.

– Subject all transactions to the regulations that such business activities are subject to (e.g. margin requirements).  Amazingly, through effective lobbying, that has not been the case

– Increase transparency.  This likely means less complexity.  A regulator needs to see and be able to understand what’s happening. “Debt and complexity don’t work well together. We have people with an up side, but apparently, no down side. This also means less over the counter trading and more on the exchanges.

Advocates of reining in the biggest banks believe these measures will help limit the size of very large banks.

Another approach to rein in megabanks failed to pass in the summer of 2013.  The Terminating Bailouts for Taxpayer Fairness Act (TBTF from the acronym for TooBigToFail) was offered by Sen. Sherrod Brown (D-Oh) and David Vitter (R-La).  The measure would have required financial institutions with more than $500 billion in assets to increase their “equity capital”.  The Independent Community Bankers of America as well as Tom Hoeing, Vice Chairman of the FDIC, endorsed the measure.  I, likewise, would support such steps.