Minneapolis Fed President Neel Kashkari on Wednesday released his plan to end too-big-to-fail banks, advocating for “much higher capital levels” for large banks and a tax on leverage for shadow banks.
Kashkari released his four-step plan in comments before the Economic Club of New York.
A former assistant secretary of the Treasury who oversaw the Troubled Asset Relief Program (TARP) that was part of the government’s response to the 2008 financial crisis, Kashkari said that while he supported Congress moving quickly to institute the Dodd-Frank financial reform act in 2010, and that “significant progress” has been made to strengthen the U.S. financial system under the act, the “biggest banks are still” too-big-to fail “and continue to pose a significant, ongoing risk to our economy.”
Many experts agree, he said, that TBTF still exists today “because current plans to address it have not been fully implemented. More importantly, we believe that the current plan, even when fully implemented, will not sufficiently minimize the threat of TBTF.”
The current plan under Dodd-Frank, Kashkari said, “fundamentally rests on the belief that the government will, through a complicated scheme, force debt holders of TBTF banks to absorb losses—even when the economy and financial markets appear weak.”
Yet, he continued, “our experience in the 2008 crisis teaches us that when markets show weakness, even debt holders of TBTF financial firms who were informed that they would bear losses in such times of distress do not actually incur any hit.”
Much higher capital levels for large banks and a tax on leverage for shadow banks “will lead covered banks to break themselves up to become non-systemically important while funded with much more capital,” Kashkari said, which will result in a financial system with “smaller banks with a much lower chance of failure.”
The current proposed resolutions aren’t “viable,” he continued, because they focus on imposing losses on creditors during a crisis. We also do not support breakup plans that merely separate investment banking from commercial banking.”
While President-elect Donald Trump has been vocal about wanting to dismantle Dodd-Frank, he has only weighed in on too-big-to fail banks by stating he “disagrees” with breaking up big banks.
Kashkari recommended in his blue-print four steps to end too-big-to-fail banks: