New Fed member Kashkari calls to break up big banks

Feb 16, 2016, 12:41 PM EST
Source: The Wharton School/flickr

New Fed member Neel Kashkari of the Minneapolis Federal Reserve called for breaking up big banks in his first official speech.

Reuters reports:

The U.S. Federal Reserve's newest policymaker on Tuesday called on lawmakers to consider "bold, transformational" rules including the breaking up of the nation's largest banks to ensure taxpayers are no longer on the hook should they fail. In his first speech as head of the Minneapolis Fed, Neel Kashkari urged a radical shakeup of Wall Street's banks, straddling the line between the Fed's policymaking remit and political advocacy. A set of regulations introduced after the financial crisis, known as Dodd-Frank, did not go far enough, he said in prepared remarks.

"Now is the right time for Congress to consider going further than Dodd-Frank with bold, transformational solutions to solve this problem once and for all," Kashkari said, arguing that the biggest banks are still too big to fail and continue to pose a significant, ongoing risk to the U.S. economy. He urged lawmakers to consider breaking up large banks into "smaller, less connected, less important entities" and took a swipe at existing rules for winding down failing banks should they run into difficulty amid a weak global economy. "I am far more skeptical that these tools will be useful," Kashkari said, adding that "we won't see the next crisis coming." He said Congress should consider compelling banks to hold so much capital that they can't fail. The former senior Treasury official and Goldman Sachs executive made no comments on monetary policy and the economic outlook in his remarks. At Treasury, Kashkari managed a key part of the banking and auto industry bailouts during the financial crisis.

Business Insider writes:

Kashkari, it is worth noting, led President Obama's TARP program — or Troubled Asset Relief Program — in the wake of the financial crisis. And so Kashkari's previous government experience dealt directly with the fallout from the US government needing to step in to rescue large US banks, and it is clear this is something he worries about having to do again. The Federal Reserve Bank of Minneapolis has been at the forefront of understanding the risks and challenges posed by large banks and moral hazard for a long time," Kashkari said. "Our work on these topics goes back to the 1970s, with specific work on [too big to fail] beginning in the 1990s. In fact, my colleague Ron Feldman and one of my predecessors, Gary Stern, both of whom are here today, authored the original book on this topic, Too Big to Fail, arguing in 2004 that policymakers would not stick to their no-bailout pledges. They were right."