Federal Reserve Bank of Dallas President Richard Fisher said the government should break up the biggest U.S. banks rather than allow them to hold a "too-big- to-fail" advantage over smaller firms.
The 12 largest financial institutions hold almost 70 percent of the assets in the nation's banking system and profit from an unfair implicit guarantee that the government would bail them out, Fisher said today in a speech at the Conservative Political Action Conference in National Harbor, Maryland. The biggest banks enjoy a "significant" subsidy, enabling them "to grow larger and riskier," he said.
"These institutions operate under a privileged status," Fisher said. "They represent not only a threat to financial stability, but to fair and open competition."
The biggest banks came under scrutiny yesterday at a Senate hearing on JPMorgan Chase & Co., which hid trading losses, according to a report by the Senate's Permanent Subcommittee on Investigations. The New York-based firm under Chief Executive Officer Jamie Dimon lost more than $6.2 billion last year in a credit derivatives bet by Bruno Iksil, known as the London Whale.
Fisher said in a phone interview with Bloomberg News that his proposal "will not lead to the denial of credit for U.S. corporations."
The cost from big banks "far exceeds the benefits," and the U.S. doesn't need "to have the largest banks in the world to compete," Fisher said after his speech.
"The point is to have healthy banks," he said. "The point is that the taxpayer is not subjected again to the kind of losses or economic disruptions that they face from having concentrated institutions."
Fisher, who will vote next year on the Federal Open Market Committee, doesn't play a direct role at the Fed on national financial regulation. That responsibility belongs to Daniel Tarullo, the Fed governor in charge of financial regulation and bank oversight.
All banks should be subject to a bankruptcy process, Fisher said in his speech. Customers and creditors of non-bank affiliates should sign disclosures accepting "that there is no government guarantee -- ever -- backstopping their investment," he said.
"Addressing institutional size is vital to maintaining a credible threat of failure," Fisher said. "Without fear of failure, these banks and their counterparties can take excessive risks."
The Dallas Fed will release a new essay on too-big-to-fail banks next week, along with responses to questions and criticisms it has received about the proposal, Fisher said.
The Dallas Fed chief's speech echoed his comments in a March 10 Wall Street Journal opinion piece co-written with Harvey Rosenblum, research director at the reserve bank.
Their plan would cap assets at divisions of the largest financial firms backed by federal deposit insurance at about $250 billion and wall off investment banking from traditional lending, Rosenblum said an interview this week with Bloomberg News. That could force JPMorgan and Bank of America Corp. to shrink their U.S. consumer and commercial-lending units by more than half.
JPMorgan shares declined 0.4 percent this week to $50.02, while financial firms in the Standard & Poor's 500 Index advanced 1.4 percent to the highest level since October 2008.
Lobby groups for the largest U.S. banks pushed back on March 11 against claims the firms remain too big to fail, rebutting assertions by lawmakers and regulators that they enjoy a "taxpayer subsidy" because of their size. Legislation known as Dodd-Frank tightening financial regulation diminished whatever advantage the biggest lenders held over smaller rivals, five industry groups wrote in a March 11 brief.
Tarullo, who has worked with Chairman Ben S. Bernanke on revamping the central bank's risk surveillance and bank monitoring, has said there's a case to be made for setting an "upper bound" to keep the largest banks from getting bigger.
"There is, then, a case to be made for specifying an upper bound," Tarullo said in an Oct. 10 speech in Philadelphia. "With the potentially important consequences of such an upper bound and of the need to balance different interests and social goals, it would be most appropriate for Congress to legislate on the subject."
Fisher, 63, joined the Dallas Fed as its chief in 2005. He is the only official among the 12 Fed district bank presidents and seven governors to have run for Congress.