Banks still 'too big to fail,' says Fed official

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A top Federal Reserve official says Congress should consider breaking up the nation’s largest banks before the need for another bailout arises.

Neel Kashkari, the new head of the Federal Reserve Bank of Minneapolis, said Tuesday that “too big to fail” institutions remain a problem and that policymakers should address the issue now before the next crisis hits.

“We must seriously consider bolder, transformational options,” he said in remarks at the Brookings Institution in Washington.

Kashkari has first-hand experience with bailouts, having served as the overseer of the 2009 program that rescued banks after the financial crisis. He took over the Minneapolis Fed in November.

Now, Kashkari is calling on regulators and lawmakers to take a second look at Wall Street regulations. While Republicans are arguing for fewer rules, Kashkari said policymakers need to do more to strengthen the system.

“Now is the right time for Congress to consider going further than [the Dodd-Frank financial reform bill] with bold, transformational solutions to solve this problem once and for all,” he said.

Among the ideas floated by Kashkari is breaking up large banks into smaller, less connected entities. Alternatively, large banks could be subjected to such extreme regulation, comparable to a nuclear power plant, that they effectively become public utilities.

He acknowledged the ideas could be “unsettling,” particularly for large banks that have pushed back hard against any notion in Washington that they need to be broken up.

But Kashkari, who saw the last bailout happen on the front lines, was blunt about what will happen if policymakers don’t do more.

“Given the massive externalities on Main Street of large bank failures in terms of lost jobs, lost income and lost wealth. … They will be forced to bail out failing institutions — as we were,” he said. “The risks to the U.S. economy and the American people were simply too great not to do whatever we could to prevent a financial collapse.”

Kashkari said the Minneapolis Fed is researching how to definitively end “too big to fail” and hopes to produce a public report by the end of 2016.