Taming the too-big-to-fails: will Dodd-Frank be the ticket?

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Date: Jan. 2012
From: The CPA Journal(Vol. 82, Issue 1)
Publisher: New York State Society of Certified Public Accountants
Document Type: Speech
Length: 4,049 words
Lexile Measure: 1420L

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The following is an edited transcript of Richard W. Fisher's remarks before Columbia University's Politics and Business Club on November 15, 2011. The views expressed are his own.

Today, I will speak to the issue of depository institutions considered "too big to fail" and "systemically important." I will argue that, just as health authorities in the United States are waging a campaign against the plague of obesity, banking regulators must do the same with regard to oversized banks that undermine the nation's financial health and are a potential threat to economic stability. I shall speak of the difficulty of treating this pernicious problem in a culture held hostage by concerns for "contagion," "systemic risk," and "unique solutions." I will posit that preoccupation with these concerns leads to an ethic that coddles survival of the fattest rather than promoting survival of the fittest, to the detriment of social welfare and economic efficiency (Andrew G. Haldane and Robert M. May, "Systemic Rise in Banking Ecosystems," Nature, pp. 351-355, January 20, 2011).

I will express my hope that, properly implemented, the capstone of financial oversight--the Dodd-Frank Wall Street Reform and Consumer Protection Act--might assist in reining in the pernicious threat to financial stability that mega-banks or "systemically important financial institutions" (SIFT) have become. But I will also express concern about the difficulty of doing so, concluding with a suggestion that perhaps the financial equivalent of irreversible lap-band or gastric bypass surgery is the only way to treat the pathology of financial obesity, contain the relentless expansion of these banks, and downsize them to manageable proportions.

The Problem with SIFIs

Aspiring politicians in this audience do not have to be part of the Occupy Wall Street movement, or be advocates for the Tea Party, to recognize that government-assisted bailouts of reckless financial institutions are sociologically and politically offensive; they stand the concept of American social justice on its head. Business school students here will understand that bailouts of errant banks are questionable from the standpoint of the efficient workings of capitalism, for they run the risk of institutionalizing a practice that distorts the discipline of the marketplace and interferes with the transmission of monetary policy.

To this last point, my colleague and director of research at the Dallas Federal Reserve Bank, Harvey Rosenblum, and I have written about how too-big-to-fail [TBTF] banks disrupt the transmission of policy initiatives ("The Blob That Ate Monetary Policy," Wall Street Journal, September 28, 2009). Our thesis was that as their losses mounted, the too-big-to-fails were forced to cut back their lending and gummed up the nation's capital markets in general. Thus, before the Dodd-Frank Act was even proposed, we wrote that "guarding against a resurgence of the omnivorous TBTF Blob [must] be among the goals of financial reform."

In previous speeches, I have taken note of another dimension to the problem of sustaining behemoth financial institutions, and that is the cost of doing so. Andrew Haldane, executive director for financial stability and a member of the Financial Policy...

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Gale Document Number: GALE|A289622044