Too-big-to-fail proves too-hard-to-solve amid calls to curb banks

Not Enough

“It’s not enough for current governmental leaders to declare we’re not going to bail them out,” Sherman said. “If an institution can credibly argue to some future president or some future Treasury secretary that if it goes down, it is going to take the economy with us, there’s a significant possibility they’re going to get bailed out.”

Karen Shaw Petrou, who keeps track of legislation and regulation for the world’s largest banks as a managing partner at Federal Financial Analytics in Washington, said she can’t rule out the possibility of legislation. Beating on the big banks is one of the few areas where Republican and Democratic populists unite, she said.

“This is going to be one of those instances where the left wing, of which there are a lot among House Democrats, and the right-wing Republicans join together,” Petrou said. “I don’t think potential legislation can be discounted.”

Regulators such as the Fed may be motivated to do more, if only to preserve their powers. Dodd had so little confidence in the Fed’s ability to oversee large banks that he sought, in a draft of his legislation in 2009, to strip the central bank of its supervisory authority.

Tarullo’s Overhaul

Tarullo, the Fed governor in charge of supervision and regulation, has overhauled the central bank’s approach. He created a task force known as the Large Institution Supervision Coordinating Committee, which draws on economic forecasters, computer modelers, payment-systems specialists and supervisors to look across several financial institutions at once to spot clusters of risk. As a result of the stress tests, the Fed now has more loan and trading-book information on the largest banks than ever before.

Still, Tarullo has expressed discomfort with large banks getting larger, saying in an October speech in Philadelphia that there’s a case to be made “for specifying an upper bound.”

While not mentioning a specific limit, Tarullo said he would recommend a “presumption of denial for any acquisition by any firm that falls in the higher end of the list of global systemically important banks.” He also said Congress could limit large-bank growth by capping non-deposit liabilities.

Fisher of the Dallas Fed said in an interview that his Jan. 16 speech caused an unusual stir in banking circles.

After the text of his talk, “Ending ‘Too Big to Fail’: A Proposal for Reform Before It’s Too Late,” was posted on the bank’s website, Fisher said he was “flooded with notes from bankers around the country.”

There was so much demand for the speech that the website crashed, he said. “This has never happened.”

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