Large, systemically important "too-big-to-fail" banks should be dismantled and broken up before regulators have to deal with another crisis, Richard Fisher, President of the Federal Reserve Bank of Dallas, said Wednesday.
Fisher, speaking at the Council on Foreign Relations in New York, said he feared that the current legislative push to give regulators resolution authority to shut troubled banks down if and when the need arises "might provide false comfort in that...[it] might be viewed favorably by creditors, continuing the government-sponsored advantage bestowed upon" large institutions.
"Given the danger these institutions pose to spreading debilitating viruses throughout the financial world, my preference is for a more prophylactic approach: an international accord to break up these institutions into ones of more manageable size -- more manageable for both the executives of these institutions and their regulatory supervisors," Fisher said, adding that he'd also support unilateral action by the U.S. on this matter.
"I think the disagreeable but sound thing to do regarding institutions that are TBTF is to dismantle them over time into institutions that can be prudently managed and regulated across borders," he said.
"And this should be done before the next financial crisis, because it surely cannot be done in the middle of a crisis."
By his own admission, Fisher's somewhat radical stance on shutting down big banks makes him something of an outlier in the Fed system.
However, the other two main points that made up the bulk of his remarks on the financial regulatory reform process were in line with the views of virtually every other Fed official who has addressed the topic.
He said that contrary to various legislative proposals, the Fed should not be stripped of its bank supervision role, a move that he claimed would severely curtail its capacity to conduct effective monetary policy. And he also argued against proposals to have the Government Accountability Office audit the Federal Open Market Committee's monetary policy deliberations.
"Were this to come to pass, I believe it would lead to the politicization of the FOMC process, injecting Congress at whim into monetary policy and, if so, eventually putting us on the on-ramp to a road that could lead the United States directly to the fate suffered by once-great economies like pre-Weimar Germany, Argentina and others that allowed monetary policy to become the handmaiden of fiscal policy," Fisher said.
In his speech, the Dallas Fed President did not address current economic conditions or monetary policy.
