By Jeff Bater
April 18 — Neel Kashkari, the president of the Federal Reserve's Minneapolis bank, is giving a new push to an old idea for countering systemic risk among the nation's biggest banks: capital requirements.
Kashkari said substantially higher capital requirements give banks a much better position to withstand unknown, and perhaps unforeseeable, shocks in the future.
Boosting bank capital was an option Kashkari floated at a key speech in February on “too big to fail.” But the idea in those earlier remarks that captured headlines was breaking up large banks as a way to address the risk posed by TBTF (31 BBD, 2/17/16).
In his latest remarks, given for a Minnesota Chamber of Commerce event as an update to the bank's initiative on ending TBTF, Kashkari pointed to the virtue in focusing on increasing common equity to assets, which seems “the simplest and potentially the most powerful in terms of safety and soundness.”
“More capital has another advantage,” he said. “We have seen extraordinary structural changes in our financial system over the past several decades. We have to be prepared for more change. More capital will absorb losses even from activities we cannot anticipate today.”
Kashkari ran the federal government's program to rescue Wall Street and the banking industry from the 2008 financial crisis. After a stint at Pacific Investment Management Company and a failed bid to unseat California Gov. Jerry Brown, Kashkari was named head of the Fed's Minneapolis bank effective Jan. 1 of this year.
The district bank is developing a plan addressing TBTF and hopes to release it by year's end. It held a symposium on the topic this month and has scheduled another for May. Kashkari said future conferences “will be open to the press and live-streamed so that we can inform the public while we learn ourselves.”
In his latest remarks, he said another option for addressing the systemic risks posed by large banks is alternative resolution mechanisms that could confront some of the perceived shortcomings of current resolution plans.
A week earlier, the Fed and Federal Deposit Insurance Corp. (FDIC) announced that the living wills of five major U.S. banks failed to satisfy their requirements, and that the companies will have to rewrite the plans (72 BBD, 4/14/16). Kashkari said the decision suggests that the plans' complexity, operations and structures continue to make their potential failure a real challenge.
“To me, this means we must work even harder to reduce the likelihood of large bank failures because resolving them in ways that does not trigger widespread economic harm is proving so difficult,” he said, adding that policy makers must work to assess whether the plans increase the transmission of risk from one bank to another.
In his remarks April 18, Kashkari also expressed worry that the Dodd-Frank law is adding to the advantage large banks have over small banks, given that complying with regulatory costs likely exhibits scale economies. “We need a regulatory system that does not add to the advantage large banks have over small ones,” he said.
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The remarks can be seen at http://src.bna.com/ecv.
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