Dallas Fed President Richard Fisher. (Photo: AP)

In a shot across the bow from Texas, Dallas Fed president Richard Fisher is trying to get Washington to take action now to finally put an end to the systemic threat too-big-to-fail banks hold over the economy.

In a proposal released Thursday, preceded by a speech laying it all out, Fisher denounced the “injustice of being held hostage to large financial institutions” by having to choose between a bailout for the top 0.2% of banks or see the economy lose more than two years of economic output in a new crisis.

The plan, described in his speech Wednesday, is to roll back the federal safety net for financial institutions to apply only to the commercial banking operations of bank holding companies, thus excluding their “shadow banking operations,” which currently enjoy implicit federal backing.

Fisher also wants shadow bank customers, creditors and counterparties—say,a Merrill Lynch client but not a Bank of America depositor—to sign a brief disclosure acknowledging the bank affiliate with which it is transacting enjoys no federal protection.

The Dallas Fed president says these measures “can be accomplished with minimal statutory modification and implemented with as little government intervention as possible.”

Giving rise for the need for such a move is what he describes as the failure of Dodd-Frank to deliver on its promise to end too-big-to-fail, or the government’s implicit guarantee of the largest financial institutions.

Of some 5,600 commercial banks in the U.S., Fisher says a mere 12—or 0.2% of all banks—fit the definition of megabanks beyond the meaningful reach of regulation because of their complexity.

As an example, Fisher notes that the FDIC has built a reputation around its ability to maintain stability in the financial system “by taking over small banks on a Friday evening and reopening them on Monday morning under new ownership.” The fear of regulators this inspires in most banks prevents them from taking on too much risk.

In contrast, there is little regulators can do to rein in a bank like JPMorgan Chase with nearly a trillion dollars in nondeposit liabilities—representing 6.3% of U.S. GDP—with more than 5,000 subsidiaries and operating in 72 countries.

For perspective, Fisher notes that more than four years later, the Lehman bankruptcy is still not resolved, yet “Lehman operated a mere 209 subsidiaries across only 21 countries and had total liabilities of $619 billion.”

In practice, this means that banks like JPMorgan, Bank of America, Goldman Sachs, Citigroup and Morgan Stanley “capture the upside of their actions but largely avoid payment—bankruptcy and closure—for actions gone wrong.”

So megabanks cratered the economy in 2007-’09 and remain a key reason for the weakness of the economy. “Put simply, sick banks don’t lend,” Fisher said. “Sick—seriously undercapitalized—megabanks…brought economic growth to a standstill and spread their sickness to the rest of the banking system.”

Meanwhile, Dodd-Frank has “made things worse, not better” by exacerbating the big banks’ advantages while strangling the smaller banks in regulations meant to curb large institutions (while failing to do so).

In 1930, bank “call reports” to the Federal Reserve had 80 entries, but excel spreadsheets submitted by bank holding companies in 2011 numbered 2,271 entries, an illustration of the complexity Fisher believes to be beyond regulation.

Dodd-Frank, he notes, runs 848 pages and has already spawned 8,800 pages of proposed regulations, compliance with which would require 2,260,631 hours of labor each year.

In the event of a megabank failure, Dodd-Frank would essentially nationalize the bank and thereby “compound the problem. In contrast, Fisher says his proposal simply “calls for reshaping TBTF banking institutions into smaller, less complex institutions…of a size, complexity and scope that allows both regulatory and market discipline to restrain excessive risk taking.”

This, he concludes, would seriously reduce chances of “another horrendous and costly financial crisis.”