Fischer opposes proposals to break up banks
New Federal Reserve Bank Vice Chairman Stanley Fischer says financial reform in the U.S. “is making significant progress in strengthening the financial system,” and he casts doubt on proposals to break up the largest banks, according to a speech he’s delivering Thursday.
As expected, Fischer’s first speech since being sworn in last month as vice chairman reflects views in the mainstream of Fed officials.
“In short, actively breaking up the largest banks would be a very complex task, with uncertain payoff,” says Fischer, 70, who formerly headed Israel’s central bank.
U.S. lawmakers such as Sen. Elizabeth Warren, D-Mass., have called for legislation to break up “too big to fail banks” banks, saying they inherently take more risks than other financial institutions. Although the Dodd-Frank financial reform includes provisions to wind down large failing banks, critics in Congress have said the federal government undoubtedly would bail them out in a crisis to protect the financial system.
Fischer, however, says that it’s unclear that busting up the largest banks would avoid the need for future bailouts. Lehman Bros., which went bankrupt in September 2008, “was not one of the giants — except that it was connected with a very large number of other banks and financial institutions.” The federal government declines to bail out Lehman Bros., partly leading to the financial crisis.
Fischer also says that the savings and loan crisis of the 1980s and 1990s was “a failure involving many small firms that were behaving unwisely, and in some cases illegally.”
Meanwhle, provisions in the Dodd-Frank reform to wind down big banks “holds out the promise of making possible to resolve banks in difficulty and no direct cost to the taxpayer — and in any event at a lower cost than was hitherto possible,” Fischer says.
He also says requirements for banks to hold more capital against losses and Fed stress tests that measure banks’ ability to withstand the hypothetical crisis “strengthen bank holding companies and thus reduce the probability of future bank failures.”
Source: Usatoday
