Federal Reserve Bank of Minneapolis President Neel Kashkari on Tuesday said Congress hasn’t gone far enough to protect the U.S. economy from potential crises and unveiled plans to study options for regulators that include breaking up the nation’s largest financial institutions.
“The biggest banks are still too big to fail and continue to pose a significant risk to our economy,” said Kashkari,who managed the U.S. Treasury’s $700 billion rescue of banks in the 2008 crisis.
Kashkari, 42, said the Minneapolis Fed will hold a series of events and collect public and financial-industry input before making proposals by the end of this year on how to address the issue. He said options to consider include breaking up big banks, forcing large banks to hold so much capital they resemble “public utilities” and taxing leverage in the financial system to alleviate risks.
Banks continue to face break-up calls more than seven years after the financial crisis. At Bank of America, for example, a shareholder is pushing a proposal for the bank to consider splitting itself up. A similar proposal failed to win enough shareholder support last year.
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Last week, Federal Reserve Board Chair Janet Yellen faced questions from Senate Banking Committee members on the Fed’s oversight of “living wills” – plans for how big banks could navigate through a failure of the company without taxpayer help. Under the 2010 Dodd-Frank financial overhaul law, regulators can break up banks if they deem the wills not credible.
Some financial institutions are grappling with issues around their size and scope in the wake of regulations put in place since the crisis.
MetLife said last month it plans to split off its Charlotte-based retail segment. The company is looking to shrink after a 2014 designation by a U.S. panel as a non-bank systemically important financial institution – a label that brings added costs and heightened regulatory oversight.
Another insurer, American International Group, last week gave board seats to two activist investors calling for the company to break itself apart. Those investors had pressured the company to split apart to escape its 2013 designation as a non-bank systemically important financial institution.
Kashkari, who took over at the Minneapolis Fed on Jan. 1 following a failed run for governor of California in 2014, compared the risk posed by big banks to that of a nuclear power plant in explaining why the government would probably have to bail out banks again in the event of another systemic crisis.
“The cost to society of letting a reactor melt down is astronomical,” said Kashkari, who was a Goldman Sachs Group Inc. banker before joining the Treasury during the administration of Republican President George W. Bush. “Given that cost, governments will do whatever they can to stabilize the reactor before they lose control.”
In her testimony before Congress last week, Yellen said regulations imposed since the financial crisis have had “very substantial payoffs in the form of a much more resilient and stronger, better capitalized, more liquid banking system.”
Charlotte Observer staff writer Deon Roberts contributed.