Halister News

(Bloomberg) -- Minneapolis Fed Pres. Neel Kashkari said increasing capital requirements of largest U.S. banks may be “straightforward way to address” too-big-to-fail issue.

• “There is a strong argument that simpler solutions are more likely to be effective than complex ones,” Kashkari said Monday in text of speech in Minneapolis; “I see virtue in focusing on increasing common equity to assets”
  • NOTE: He has previously called for breaking up largest banks
• More capital will “absorb losses even from activities we cannot anticipate today”; won’t be “direct firewall” that contains risk, yet should prevent risk from intensifying from bank to bank
• At April 4 Minneapolis Fed symposium of experts, “compelling” argument was made that there’s “little evidence” recent growth of large banks has led to economic benefits for U.S.
  • Recommendation was made to impose “effective cap” on bank size of ~$350b and dramatically increase capital requirements if a bank exceeds that size
  • Experts also expressed doubt about how easy it would be to implement a “break-up” plan; image of govt analysts arbitrarily deciding how to divide a “trillion-dollar bank” gives “many people concern -- including me”
  • Given “sufficient incentive,” banks should “be able to restructure themselves”
• Still thinks largest U.S. banks are “too big to fail,” “skeptical that current efforts to fix that problem will ultimately work”
  • While many current efforts are headed in “right direction,” “I am not sure those measures go far enough”; worries officials will ultimately turn to taxpayers again instead of imposing losses on creditors
  • Dodd-Frank may be boosting advantage large banks have over smaller banks
• Minneapolis Fed is developing own plan for ending TBTF, which will be released yr-end; one idea is to create alternative resolution mechanisms that could address any shortcomings in current resolution plans
• European banks’ contingent convertible debt, designed to convert to equity if bank faces trouble, may be “mechanism” that spreads uncertainty from bank to bank
  • Has “serious concerns” that such debt will add to uncertainty during crisis rather than reduce it
• One difficulty during 2008 crisis was that a “run” at one bank could quickly become a run at multiple banks; there was also problem of sticking debt holders with losses at GSEs
• NOTE: Kashkari, a former Pimco executive and Treasury official who oversaw TARP program, joined Minneapolis Fed in Jan.; he succeeded Narayana Kocherlakota