By Brai Odion-Esene and Vicki Schmelzer
NEW YORK (MNI) – Efforts to impede stricter capital standards for
global banks must not be allowed to succeed. The rules are needed to
make the financial system “fit and proper” and not one dominated by
pampered too-big-to-fail institutions, Dallas Federal Reserve President
Richard Fisher said Tuesday.
In remarks prepared for Columbia University’s Politics and Business
Club, Fisher, never one to mince words, said “just as health authorities
in the United States are waging a campaign against the plague of
obesity, banking regulators must do the same with regard to oversized
banks that undermine the nation’s financial health and are a potential
threat to economic stability.”
He made the argument that a preoccupation of regulators with
concerns about contagion, systemic risk and “unique solutions” when it
comes to global banks “leads to an ethic that coddles survival of the
fattest rather than promoting survival of the fittest, to the detriment
of social welfare and economic efficiency.”
Fisher noted the latest attempts to improve international bank
capital standards and tighten up the definition of what can be counted
as capital — removing “terminology inexactitude” — has elicited a
fierce backlash from the banking industry.
“We cannot let that resistance prevail,” he said.
In addition, Fisher said regulators must insist, as mandated by the
Dodd-Frank act, that systemically important financial institutions
submit a “living will” laying out their orderly wind down in the event
of failure.
In light of ongoing fears about the crisis in Europe and possible
spillover to the United States, Fisher also said credit exposure reports
must also be submitted periodically to estimate the extent of SIFI
interconnectedness.
“This is essential to restoring the discipline of the marketplace
and is what the Fed expects to achieve when it finalizes its work on
Section 165 and other aspects of the legislation, as discussed last week
by Vice Chair Janet Yellen in a speech in Chicago,” he said.
Commenting further on Europe, Fisher said this problem of
“supersized and hypercomplex” banks is not limited to the U.S., as
Europe is struggling today with how to cushion its megabanks from
excessive exposure to intra-European sovereign debt.”
Systemic risk is more pronounced than ever in today’s global
financial system, he said, and when a systemic crisis occurs the results
can be “catastrophic to the economy.”
This is why a solution to the Eurozone crisis, one that removes the
threat of defaults and bank runs, is also in the interest of U.S.
financial institutions, Fisher said.
And while efforts are underway by EU authorities to come up with a
unique solution, for Greece in particular, that would achieve just that,
Fisher believes this could make the problem worse in the long run.
“It seems to me that in our desire to avoid ‘cascading default’ and
‘catastrophic risk,’ and in our search for ‘exceptional and unique
solution(s),’ we may well be compounding systemic risk rather than
solving it,” he said. “By seeking to postpone the comeuppance of
investors, lenders and bank managers who made imprudent decisions, we
incur the wrath of ordinary citizens and smaller entities that resent
this favorable treatment, and we plant the seeds of social unrest.
“We also impede the ability of the market to clear or, to
paraphrase Milton, allow the marketplace to distinguish ‘freely’ those
who should stand and those who should fall.”
Fisher takes aim at a banking industry that he says has become more
concentrated with each passing year, with half of the entire industry’s
assets now on the books of five institutions.
Fisher said he believes that too big to fail banks “are too
dangerous to permit,” and took issue with the Dodd-Frank Act.
The law’s Achilles heel, according to Fisher, is the fact that it
requires the Federal Deposit Insurance Corp. — when winding down failed
large banks — to do so in a manner “that … mitigates the potential
for serious adverse effects to the financial system.”
“Directing the FDIC to mitigate the potential for serious adverse
effects leaves plenty of wiggle room for fears of ‘cascading defaults’
and ‘catastrophic risk’ to perpetuate ‘exceptional and unique’
treatments, should push again come to shove,” he said.
So his solution? An international accord that would break up these
institutions into a more manageable size.
“In my view, downsizing the behemoths over time into institutions
that can be prudently managed and regulated across borders is the
appropriate policy response,” Fisher argued. “Ultimately, we should move
to end too big to fail and the apparatus of bailouts and do so well
before bankers lose their memory of the recent crisis and embark on
another round of excessive risk taking.”
“Then, creative destruction can work its wonders in the financial
sector, just as it does elsewhere in our economy,” he concluded.
** Market News International New York Newsroom: 212-669-6430 **
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