How to Cut Megabanks Down to Size

New York Times Published: January 19, 2013 Fair Game
How to Cut Megabanks Down to Size 

Ms. Morgenson reports on a speech by Richard W. Fisher, President of the Federal Reserve Bank of Dallas, which makes the following points, based on a report by the DallasFED.

  • Of 5,600 commercial banking institutions in the country, about 5,500 of them are community banks (98.6% of all banks). They hold only 12% of total industry assets. They are routinely allowed to fail if they get into trouble. Few of them did during the crisis.
  • The 12 largest banks (0.2% of all banks) hold 69% of industry assets. These are the banks that enjoy all the perquisites of the federal safety net: significantly lower borrowing costs and a taxpayer backstop, for example.
  • Huge banks must be restructured and their access to the safety net scaled back, Mr. Fisher said, because neither regulators nor market participants have proved effective in monitoring risks at these institutions.
  • Until that happens,
    1. Only commercial banking should be protected by federal deposit insurance.
    2. Securities trading, insurance operations and real estate investments should not be protected.
    3. Banks should require customers and trading partners to sign an agreement stating that they understand the business they are conducting is not covered by any federal protection or guarantees. That would begin to reduce the perception that these banks are “too big to fail.”

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