Those "too big to fail" banks that control most of the assets in the U.S. banking industry have created a lopsided financial system and uneven playing field, and those lengthy, ineffective financial regulation rules need to be modified, said a senior official with the U.S. central bank on Monday.
Almost 70 percent of the assets in the U.S. banking industry are currently controlled by a dozen megabanks. And the process intensified during the 2008-2009 financial crisis, when several falling giants were absorbed by larger ones, noted Richard W. Fisher, president of the Federal Reserve Bank of Dallas.
In an article published on The Wall Street Journal, Fisher argued that implicit government policy has made the big banks exempt from the normal processes of bankruptcy, which would embolden a sense of immunity from the law and excessive risk- taking.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, the biggest overhaul of the U.S. financial regulation enacted by President Barack Obama in 2010, was "a well-intentioned response" to the problem. However, "its stated promise — to end ‘too big to fail’ — rings hollow," Fisher said.
"Dodd-Frank is long on process and complexity but short on results," he observed. "Further, market discipline is still lacking for the largest dozen or so institutions, as it was during the last financial crisis."
Fisher suggested that the U.S. Congress should rewrite the Dodd- Frank Act so that it actually ends the problem of banks that are too big to fail.
In his view, the federal safety net — deposit insurance and the Federal Reserve’s discount window — should be rolled back to apply only to traditional commercial banks. Meanwhile, customers, creditors and counterparties of all nonbank affiliates and the parent holding companies would sign a simple, legally-binding, unambiguous disclosure acknowledging and accepting that there is no government guarantee backstopping their investment.