One U.S. Federal Reserve president is aiming to solve the “too big to fail” problem in the U.S. financial system once and for all.
Neel Kashkari, the president of the Minneapolis Federal Reserve, explained part of his plan to the FOX Business Network, during an interview with Liz Claman on Countdown to the Closing Bell.
“That last one [part of the plan] is once a bank gets into trouble, how do we make sure the government can allow it to fail without causing chaos in financial markets,” Kashkari said. “When Lehman Brothers failed, it almost brought down our financial system. So the Dodd-Frank law, with its living will and the resolution mechanism built in there, is trying to allow banks to fail.”
He added that one of the results of the living wills has still made many of America’s biggest banks remain too big to fail. Many experts have proposed other ways to keep the banks, in the event of another financial crisis, from bringing down the financial system. Some of those proposals include new chapters of bankruptcy, or other alternatives that could allow regulators to wind down a bank, to haircut their bond holders.
“This is a really complicated issue. We’re trying to dig into a lot of detail to make sure that taxpayers are not on the hook and the financial system is sound and safe,” Kashkari said.
The biggest risk he sees is time. Kashkari argues the clock is running out on preventing a financial situation, similar to the one in 2008, from happening in the future.
“If we don’t act while we still remember how bad the crisis was, I’m afraid we’re going to turn the chapter on this,” he said. “We’re going to tell ourselves, ‘hey, this problem can’t happen again.’ And then 20, 30, 50 years from now we may face another terrible crisis like we faced in 2008. Societies tend to forget, everybody moves on. We need to deal with the crisis once and for all.”
Kashkari said his plan focuses on the biggest banks in the U.S. that are the most impactful to the U.S. financial system, not the smaller regional banks.
“If we can really address the 'too big to fail' issue, then I’m hopeful we can relax some of the regulations that are weighing down the small and mid-size banks that are not at risk of bringing down the U.S. economy.”