Fed regional head: End mega banks to reduce US economy risk

NEW YORK

The head on of the Federal Reserve regions said Tuesday that the bank is working on a plan to divide up big banks in order to prevent their threat to the economy.

"I believe the biggest banks are still too big to fail (TBTF) and continue to pose a significant, ongoing risk to our economy," said Minneapolis Fed President Neel Kashkari.

Speaking at the Brookings Institution think tank about potential risks to the U.S. economy, Kashkari said the Minneapolis Fed is developing “an actionable plan” that is scheduled to be delivered to Congress by the end of the year.

Kashkari said TBTF banks were not the only reason behind the 2008 financial crisis, but their contribution was significant because of the damage on the economy.

"Given the scale of job losses, home foreclosures, lost savings and costs to taxpayers, there is widespread agreement among elected leaders, regulators and Main Street that we must solve the problem of TBTF," he said.

The housing bubble in the U.S. that peaked in 2006 resulted in some of the biggest financial and investment banks in the country facing bankruptcies.

Yet, they were bailed out by the U.S. government with the help of more than $900 billion.

"To ensure that banks can fail without requiring taxpayer bailouts, regulators are using the living will review process to try to address the hurdles that make large banks so hard to resolve.

They are establishing a resolution approach intended to give regulators the ability to restructure large banks without massive spillovers," Kashkari said.

He urged that more should be done, and listed some of the transformational options that could be implemented, including breaking up large banks into smaller and less connected entities, turning large banks into public utilities to prevent their failure by making them to hold too much capital and taxing leverage throughout the financial system to reduce systemic risks.

"If we are serious about solving TBTF, we cannot let them paralyze us ... only the balance sheet of the federal government would be strong enough to stabilize the financial system, as was required in 2008," he said.