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

Fisher’s Bull

The Dallas Fed’s Fisher, who keeps a breeding bull named “Too Big to Fail” on his Texas ranch, proposed in a Jan. 16 speech that regulators be explicit about what kinds of banking the government will backstop. Deposit insurance and discount-window loans would be available only to a firm’s commercial and consumer-banking operations. Fisher’s proposal would push other risk-taking businesses, such as investment banking, away from government support, raising their cost of funding.

House Financial Services Chairman Jeb Hensarling said his panel will look at alternatives to the so-called liquidation authority in Dodd-Frank, which gives the Federal Deposit Insurance Corp. power to take over failing financial groups. He and fellow Republicans on the committee have argued that the plan keeps taxpayers on the hook for bailing out large banks because it lets the FDIC borrow from the Treasury to purchase a failing bank’s assets and pay off its creditors.

“There is something fundamentally wrong in our nation if there are financial institutions that are deemed too big to fail and others too small to matter,” Hensarling, of Texas, said in an interview.

Living Wills

Dodd-Frank and the nation’s banking regulators already have taken steps aimed at limiting the risk that a large bank will fail. The Fed conducts annual stress tests on the 19 largest financial firms to determine whether they need to boost capital and limit dividends. Banks file “living wills” to the FDIC describing how they could be wound down. The Fed also is focusing on how boards monitor risk and set compensation.

Big banks and their representatives in Washington say such initiatives are evidence that Dodd-Frank is working and doesn’t need an overhaul.

The notion that banks are “still somehow protected from market discipline” is “demonstrably false,” Rob Nichols, CEO of the Financial Services Forum, a Washington-based lobbying organization, wrote in a rebuttal to Fisher published Jan. 28 in the Dallas Morning News.

System Strengthened

“Fisher and other breakup proponents overlook major provisions of the Dodd-Frank Wall Street Reform Act that effectively end the problem of ‘too big to fail,’ as well as significant action taken by large banks that has dramatically strengthened the U.S. financial system,” wrote Nichols, whose group includes the heads of some of the world’s largest banks, including Credit Suisse Group AG and Goldman Sachs Group Inc.

Breaking up large banks would put U.S. financial institutions at a competitive disadvantage, according to a report being published today by Hamilton Place Strategies, a Washington-based consulting firm founded by Tony Fratto, a White House and Treasury Department spokesman during the administration of George W. Bush.

“Ultimately, breaking up U.S. banks will not improve the safety of the global financial sector and would reduce U.S. influence over the financial sector globally,” the firm wrote.

Jamie Dimon, CEO of JPMorgan, told clients in Germany Jan. 21 that regulators and banks should develop systems to let lenders go bust without damaging the world economy.

“We have to ensure big banks can be taken down without harming the public and at no cost to them,” Dimon, 56, said at a panel discussion in Koenigstein, near Frankfurt.

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