The Fattest or the Fittest?

The New York Times

ELIMINATING the benefits reaped by institutions that are too politically powerful and interconnected to fail has been an elusive goal in the aftermath of the credit crisis. Institutions most likely to receive assistance from the federal government if they become troubled — behemoths like Citigroup, Bank of America or Wells Fargo — have grown only larger in recent years. Efforts to pare down these banks have met well-financed resistance among policy makers.

Happily, though, reducing the perils of gargantuan institutions — and the threat to taxpayers — is an idea that seems to be taking hold in Washington. To be sure, the army arguing for change is far outgunned by the battalions of bankers and lobbyists working to maintain the status quo. But some combatants seeking reform believe they are making headway.

Richard W. Fisher, the president of the Federal Reserve Bank of Dallas, is one. In a speech last month he described, quite colorfully, the problems of these unwieldy institutions and the regulatory ethic “that coddles survival of the fattest rather than promoting survival of the fittest.” Bank regulators should follow the lead of the health authorities battling obesity rates among our population, he said, adding that he favored “an international accord that would break up these institutions into more manageable size.”

This is a banker talking, not a member of the Occupy Wall Street drum circle.

And yet, some have criticized Mr. Fisher for voicing these sensible views — a sign to him that the issue is gaining traction. In an interview last week, he said: “Judging from the anguished calls I received from lobbyists for the megabanks, the ‘attaboy’ calls I am getting from regional and community bankers and the requests for copies of the speech from senators on both sides of the aisle, it appears this is a hot topic.”

That Mr. Fisher has received encouragement from both conservatives and liberals on his views leads him to conclude that “this is an issue that can transcend bipartisan politics.”

Last week, Senator Sherrod Brown, the Ohio Democrat who leads the Senate Banking subcommittee on financial institutions and consumer protection, held a hearing on how to shield Main Street from what he calls megabank risk. In April 2010, he was a co-sponsor of the Safe Banking Act of 2010 with Ted Kaufman, the former Democratic senator from Delaware. The bill, which would break up some of the largest banks by requiring caps on institution size and leverage, ran into a buzz saw of opposition from the usual suspects.

But Mr. Brown soldiers on; he said in an interview on Thursday that he, too, believes the debate is changing. “We’re seeing sentiment grow on the Brown-Kaufman idea,” he said. “We are seeing some people who are pretty conservative here understanding the implicit subsidies these megabanks receive. Our goal is that senators understand this to the point of wanting to take action.”

He said he hoped his hearing would educate colleagues on the significant financial bounties received by big banks that are not allowed to fail, especially their lower borrowing costs — a result of investor belief that taxpayers will rescue them. This places these banks at an unfair advantage over their smaller competitors.

“Why should the Bank of America enjoy an advantage the Peoples Bank in Coldwater, Ohio, doesn’t get?” Mr. Brown asked. “The government’s got to pull away from this and level the playing field.”

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