Dallas Federal Reserve Bank President Richard Fisher Urges Dodd-Frank Rewrite, Economy In Constant Jeopardy End Too-Big-To-Fail

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(MNI) - Dallas Federal Reserve Bank President Richard Fisher called Saturday for a rewrite of the Dodd-Frank legislation, which he argued perpetuates a system of "too-big-to-fail" banks that unfairly disadvantages smaller banks and threatens financial stability.

The subsidization of the largest financial institutions must end, Fisher said in a speech prepared for delivery to the Conservative Political Action Conference National Harbor, Maryland, just outside of Washington, D.C.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was designed in part to correct the "systemic risks" posed by the largest banks, but Fisher said it not only fails to do so, but entrenches the too-big-to-fail problem. This is an argument that some of his Fed colleagues also have made before.

"Without delay, Congress should rewrite Dodd-Frank so that it actually ends the problem of banks that are too big to fail," Fisher said.

Fisher said "a dozen megabanks today control almost 70% percent of the assets in the U.S. banking industry," and he said those banks "are treated differently from the other 99.8% and differently from other businesses."

"Implicit government policy has made the megabank institutions exempt from the normal processes of bankruptcy and creative destruction," he said. "Without fear of failure, these banks and their counterparties can take excessive risks."

Because of their size and perceived federal protection, "the megabanks can raise capital more cheaply than can smaller banks," said Fisher, who cited estimates their funding advantage at $50 billion to $100 billion annually for U.S. TBTF banks alone, and $300 billion for 29 global institutions identified as "systemically important."

Fisher said "whatever the precise subsidy number is, it exists, it is significant, and it allows the biggest banking organizations, along with their many nonbank subsidiaries (investment firms, securities lenders, finance companies), to grow larger and riskier."

"This is patently unfair," he said. "It makes for an uneven playing field, tilted to the advantage of Wall Street against Main Street, placing the financial system and the economy in constant jeopardy."

Fisher said the 849-page Dodd-Frank Act, for which more than 9,000 pages of regulations have been promulgated thus far, is "long on process and complexity but short on results."

"Regulators cannot enforce rules that are not easily understood," he said. "Nor can they enforce these rules without creating armies of new bureaucrats."

And "despite the plethora of new rules and regulations created by Dodd-Frank, market discipline is still lacking for the largest dozen or so institutions, as it was during the last financial crisis," he said.

Fisher proposed three sets of reforms:

"First, we would roll back the federal safety net - deposit insurance and the Federal Reserve's discount window - to apply only to traditional commercial banks, and not to the nonbank affiliates of bank holding companies or the parent companies themselves (for which the safety net was never intended).

"Second, customers, creditors and counterparties of all nonbank affiliates and the parent holding companies would sign a simple, legally binding, unambiguous disclosure acknowledging and accepting that there is no government guarantee - ever - backstopping their investment. A similar disclaimer would apply to banks' deposits outside the Federal Deposit Insurance Corp. (FDIC) protection limit and other unsecured debts.

"Third, we recommend that the largest financial holding companies be restructured so that every one of their corporate entities is subject to a speedy bankruptcy process, and in the case of the banking entities themselves, that they be of a size that is 'too small to save.'"

Fisher said "the aim of our three-step proposal is simple: All banks would be subject to the same regulatory oversight - and most important, they all would be subject to the market discipline exercised by owners and creditors."

--MNI Washington Bureau; tel: +1 202-371-2121; email: sbeckner@mni-news.com

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