The Federal Reserve Bank of Minneapolis won’t back off its campaign to map out tougher banking industry reforms despite sharp criticism and a lack of involvement by the big banks themselves, its president said this week.
Neel Kashkari’s unabashed stance on the need for greater regulation has put a spotlight on the Minneapolis Fed – the smallest one in the Federal Reserve’s network – since he took the reins in January. The next month, he declared that several U.S. banks remain “too big to fail.”
The nonpartisan Minneapolis Fed plans to develop policy recommendations before the end of the year, with an eye toward Congressional action. So far, though, the banking industry has proved predictably tough to convince.
Representatives for some of the nation’s largest banks have rebuked Kashkari’s advocacy for greater government intervention – potentially including a breakup of the largest lenders, treating them as capital-rich utilities so they virtually can’t fail and taxing debt across the financial system to limit risk-taking.
Kashkari said he personally called leading trade groups that represent the industry’s goliaths, but all declined invitations to participate in a sometimes-heated Monday forum that brought together nearly a dozen experts. It was the first in a series that will inform the Minneapolis Fed’s action later this year.
In part, major banks have raised concerns that smaller banks and their clients would be at a competitive disadvantage in a global marketplace. Some of Kashkari’s critics say Dodd-Frank reforms – enacted after the recession to increase lenders’ capital requirements and keep their risk-taking in check – go far enough.
Financial industry consultant Gene Ludwig sat on one panel, urging thoughtfulness in the debate over whether to break up large lenders. Other speakers questioned whether further reforms are needed, but Kashkari said he had hoped to include banks’ firsthand viewpoints in the event.
“We’re going to continue to invite them, say they’re welcome to participate, but we’re not going to allow them to derail our process,” he said.
The full day of discussion turned contentious at various points on Monday. Panelists traded jabs during the event and debated between themselves on the sidelines, exposing the complexity of the too-big-to-fail debate.
Featured speakers included Stanford University professor Anat Admati, who kicked off the day with a sharp critique of banks for holding too little capital compared to their risk exposure. She called existing regulations a charade.
“The expansion of the business of banking has been massive,” Admati said. “The opacity is unbelievable.”
Simon Johnson, the former International Monetary Fund chief economist and a professor at MIT, advocated for a cap on the size of banks.
Restricting lenders’ asset loads would limit undue protections for banks, he argued. Citigroup, for example, was rescued from bankruptcy during the last downturn by its sheer size — the government could not let it go under.
“I don’t see how you have capitalism if anybody has an exemption from bankruptcy,” Johnson said during the all-day forum, packed to capacity and streamed online.
The diverse, and at times contentious, perspectives largely trotted out arguments made before. But Kashkari was quick to say the event’s underlying purpose was to draw the public into a complex and nuanced debate over how well the government can insulate itself from economic fallout.
Kashkari played a role in the nation’s economic triage during the last recession, and says he wants leaders to do better in the future. He oversaw the U.S. Treasury’s Troubled Asset Relief Program — a central piece of the government’s effort to rescue banks in 2008.
“To put a finer point on it, I’m the guy who bailed out the banks,” Kashkari told about 200 attendees at a public question-and-answer session on Monday evening. He recalled “a terrible choice” between stabilizing the economy through taxpayer-funded bailouts and the threat of collapse.
The TARP ended up pouring about $425 billion into floundering financial institutions. To date, the government has earned that back, with interest, to the tune of about $440 billion. But the outlook wasn’t always so bright.
“In the worst moments of the crisis, I did not think we would get $1 back,” Kashkari said. “The fact that we stabilized the heart attack and we got the money back is a miracle. I hope that we never have to do it again.”
To some critics’ point that Kashkari is fixating on past issues rather than future problems, he said the government needs to plug gaps that allowed the last recession to gut the U.S. economy. That approach, he said, will make the banking sector more resilient down the line.
“The cost of the crisis was still devastating for the American people,” he told reporters, estimating tens of trillions of dollars in lost wages, home values and other costs. “I fear that if we don’t move quickly while we still remember those lessons, we’re going to miss our window to address ‘too big to fail’ once and for all.”
The push builds upon the Minneapolis Fed’s rich tradition of analyzing banking sector stability. Researchers at the Minneapolis Fed first dug into the issue in the 1970s and deepened their focus during the 1990s.
Going forward, the bank will pair its takeaways from Monday’s forum with other research addressing “too big to fail” banks. On May 16, the bank will host its next forum and public conversation.
“It’s not popular,” Kashkari said. “A lot of people are unhappy that we’re doing this, but I feel like we would not be doing our jobs if we were not standing up to talk about the risks that we see.”
Correction: An earlier version of this story misstated the amount of money recouped from the Troubled Assets Relief Program. The story has been updated with the correct amount.
Minneapolis Fed chief says banks ‘still too big to fail’
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