NEW YORK?Federal Reserve Bank of Minneapolis President Neel Kashkari on Wednesday recommended a hefty increase in capital requirements for the country's biggest financial institutions, a de facto call for breaking up the big banks.
The recommendations are part of a 50-page report that comes after a nearly yearlong effort by Mr. Kashkari to explore ways to end the problem of "too big to fail" banks, which could leave taxpayers on the hook if the financial system were to come under threat again.
Mr. Kashkari said at an event hosted by the Economic Club of New York that if his "Minneapolis Plan" is implemented, "We will have fewer mega banks, and there will be far less concentration in the banking system?.If there are any [too big to fail] banksleft, they will be so well-capitalized that their risk of failure will truly have been minimized."
The consequences of the report, which is being sent to policy makers and to Congress, are unclear. President-elect Donald Trump stirred up anti-Wall Street sentiment but has also called for dismantling the 2010 Dodd-Frank regulatory-overhaul law that imposed tougher rules for the financial system.
Mr. Kashkari's plan calls for banks with more than $250 billion in assets to hold common equity equivalent to 23.5% of risk-weighted assets. The equivalent leverage ratio would be 15%.
Those figures are multiples of current capital requirements and are aggressive when compared with other proposals aimed at raising such thresholds. But they are in line with a general push for new legislation sponsored by both Republicans and Democrats in Congress aimed at making the financial system safer by forcing banks to hold more capital.
Mr. Kashkari, aformer top Treasury Department official during the financial crisis, has made ending "too big to fail" the cornerstone of his tenure at the regional bank since taking the helm in January. He announced his plan to explore how to make the banking system safer to much fanfare about a month after taking over the post.
The Minneapolis Fed has held numerous conferences on the topic since, with a number of well-known big bank critics?such as Stanford University's Anat Admati and Massachusetts Institute of Technology's Simon Johnson?proposing solutions that appear to have shaped Mr. Kashkari's final conclusions.
In addition to higher capital requirements, Mr. Kashkari's plan calls for the Treasury secretary to certify that a bank doesn't pose a systemic risk to the financial system. For every year that Treasury cannot give such certification, a bank will face additional common equity requirements of up to 5% of risk-weighted assets each year, with a cap of 38%.
"We believe that these automatic increases in capital requirements will lead banks to restructure themselves such that their failure will not pose the spillovers that they do today and thus will not lead to bailouts," the report says.
Other key components of the plan include a tax of at least 1.2% on large "shadow banks," or financial institutions such as hedge funds and mutual funds, to discourage the use of debt. Mr. Kashkari also calls for regulatory relief for community banks.
The report says that if the recommendations are instituted, the chance of a financial crisis could be as low as 9%. Mr. Kashkari estimates that regulations imposed since the financial crisis have reduced the chance of another crisis from 84% to 67%.
Mr. Kashkari has often compared the trade-offs for a stronger banking system to heightened security protocols due to the threat of terrorism. For both, the risk can't be eliminated, but societyneeds to determine what costs they are willing to pay to minimize risk, he explained.
"Regulations can make the financial system safer, but they come with costs of potentially slower economic growth," he said in his speech Wednesday. "Ultimately, the public has to decide how much safety they want in order to protect society from future financial crises and what price they are willing to pay for that safety."
Write to Shayndi Raice at firstname.lastname@example.org
(END) Dow Jones Newswires
November 16, 2016 08:05 ET (13:05 GMT)
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