Kashkari unveils “too big to fail” plan

A Top Federal Reserve official unveiled his ambitious plan to ensure the nation’s biggest banks are no longer “too big to fail.”

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, argued that his approach could drastically reduce the possibility of a future bank bailout, by forcing banks to hold significantly more capital as a cushion against any future losses. And in turn, he argued, the financial system would be safer and gigantic banks would have a much smaller footprint.

{mosads}“What will the financial system look like after the Minneapolis Plan has been fully implemented?” he told the Economic Club of New York. “We will have fewer mega banks, and there will be far less concentration in the banking system.”

Under Kashkari’s proposal, the nation’s largest banks would have to dramatically increase their capital holdings. Any bank with over $250 billion in assets would be required to boost its common equity capital to 23.5 percent of its risk-weighted assets, and would have to hold a leverage ratio of 15 percent.

Second, the Treasury Secretary would have to certify that each of the nation’s largest banks no longer poses a threat to the financial system. If he or she is unable to make that certification, banks would be required to hold even more capital, which would steadily increase until the Treasury Secretary felt comfortable declaring that institution to pose no threat.

The third step of Kashkari’s plan would require shadow banks, which fall outside the traditional regulatory structure for banks, by imposing a new tax on any borrowing done by shadow banks with over $50 billion in assets. That tax rate could rise or fall, depending on how significant a particular shadow bank is to the financial system.

And Kashkari also called for a relaxing of regulations for smaller banks, freeing them up to compete more easily with large institutions.

A top Treasury official during the financial crisis, Kashkari has made tackling “too big to fail” a central goal of his since taking over the Minneapolis Fed nearly one year ago.

In his remarks Wednesday, Kashkari argued that it is impossible to erase the risk of future financial turmoil, but like the government tries to minimize risk in fighting terrorism, so too should it work to minimize the chances of a future financial crisis while balancing the costs that come with it.

“We cannot make the risk zero, and safety isn’t free. Regulations can make the financial system safer, but they come with costs of potentially slower economic growth,” he cautioned. “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.”

Kashkari’s proposal is up for public review, and will eventually be sent to policymakers in Washington. However, it faces an uncertain future there, as the environment surrounding financial rules is expected to face significant upheaval as President-Elect Donald Trump prepares to occupy the White House.