In his first speech as Federal Reserve vice chairman, Stanley Fischer defended the regulatory agencies’ progress in financial stability rules and called for continued work toward ending the idea that any banks are “too big to fail.” He questioned the wisdom, however, of breaking up large banks in pursuit of that goal.
In a speech to academic economists in Cambridge, Mass., Fischer discussed research on whether banks continue to receive implicit too-big-to-fail subsidies and examined the tools regulators have to wind down large financial institutions, including the FDIC’s “single point of entry” approach -- which he said “holds the promise of making it possible to resolve banks in difficulty at no direct cost to taxpayers” -- and living wills.
“What about simply breaking up the largest financial institutions?” he asked. “Well, there is no ‘simply’ in this area.” Much depends, Fischer pointed out, on whether any financing advantage large banks enjoy is due to economies of scale, to perceived too-big-to-fail status or to a mix -- an unsettled issue that makes the response complex. “Actively breaking up the largest banks would be a very complex task, with uncertain payoff,” he noted.
Fisher also addressed the general need for coordination among several regulators and authorities in dealing with macroprudential problems. Fisher drew on a recent speech by Don Kohn, noting that requirements for successful macroprudential supervision include: the ability to identify risks to financial stability, to be willing and able to act on these risks in a timely fashion, to be able to interact productively with the microprudential and monetary policy authorities, and to weigh the costs and benefits of proposed actions appropriately. FSOC does not have the legal power to impose polict changes on regulators, it is mostly only a coordinating body.
ABA and its members of all sizes have advocated ending too big to fail, supporting efforts by the Fed and other regulators to develop appropriate and effective tools and policies instead of arbitrary measures like artificial asset caps and restrictions that can harm industry competitiveness and inadvertently boost shadow banking.
Read Fischer’s speech.
Read ABA’s white paper on Bank Diversity.