Following up on plans stated in February, the Federal Reserve Bank of Minneapolis [1]has launched an initiative [2] to end too big to fail (TBTF).
At a recent talk before the Minnesota Chamber of Commerce [3], Minneapolis Fed president Neel Kashkari said that while he still believes some major banks are indeed too big to let die and that while he does think the federal government’s initiatives of the past eight years to ward off a repeat of 2008’s financial calamity are essentially fine, TBTF itself runs the risk of laying the burden of financial risk back in the laps of taxpayers.
Kashkari, who ran the Troubled Asset Relief program under the first Obama administration, said the major problem with TBTF is that the initiative’s fundamental protection for taxpayers‒‒to redirect any financial hit towards investors‒‒sounds good in theory, but has never worked in other crises. Moreover, he said, “I doubt it will work in the future. I fear policymakers will have to turn to taxpayers rather than impose losses on creditors” as has happened whenever investors were supposed to have taken the hit.
Kashkari cited the trouble the federal government had in the early says of the 2008 collapse to mitigate the spread of risk between large banks. Efforts to recapitalize one bank by “haircutting” creditors or counterparties threatened to increased stress at other banks as creditors worried they might face losses. In effect, he said, a run at one bank could quickly become a run at multiple banks.
Kashari said he essentially fears a replay of the same problems TARP suffered, just under a new banner and on a different calendar page. During the 2008 crisis, he said, widespread risk in financial markets compelled the Treasury to protect GSEs’ subordinated debt “rather than haircut it. The risky economic environment prevented debt that had been specifically issued to absorb losses from being harmed. Instead, taxpayer money again had to be used to recapitalize the GSEs.”
The Minneapolis Fed will host a series of public symposiums throughout 2016, featuring experts who will help examine the issues, Kashkari said. The formal plan on how to end TBTF will be released to the public by the end of the year, once expert and public opinion are weighed.
In February [4] Kashkari outlined three potential options when he first announced the plan to end TBTF: Break up or alter the structure big banks; substantially increasing capital requirements; and tax leverage across the financial system.
The Minneapolis Fed’s next symposium is scheduled for May 16.