Wall Street’s biggest banks are still perceived as so big that they would be bailed out by the government in case of failure, which leaves the financial system vulnerable to another crisis and gives those firms an unfair advantage in their business.
That was the key message from Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, during a visit to the Peterson Institute for International Economics this week, which cohosted the “Symposium on Ending Too Big to Fail” along with the regional Fed.
“Large banks currently remain too big to fail,” Kashkari said. “As memories of the crisis fade, the will to complete the implementation of current reforms weakens.”
“This outcome leaves the financial system exposed to unacceptable risks if reforms are left incomplete,” he said.
Fed Chair Janet Yellen echoed Kashkari’s sentiment on the viability of winding down major banks when asked about the issue during a hearing on Thursday. “I would not say at this point that all [banks] are ready for resolution” in case of failure, she said.
Kashkari said regulatory reforms that followed the financial crisis, embodied in the Dodd-Frank Act, have made some strides toward making the banking system safer. But he worries the new rules are too complex and might break down in a time of crisis. Kashkari, who once worked at Goldman Sachs and whose previous role in government was as manager of the Treasury bank bailout fund known as the Troubled Asset Relief Program, or TARP, previously expressed sympathy for the possibility that some very large banks might need to be broken up.
In an interview following the event, Kashkari said his suspicion of regulators’ ability to wind down very large and complex banks comes from his own firsthand experience facing the 2008 meltdown that left the economy on the brink of depression.
“I look at today’s regulations and they’re very cleverly designed—I almost think that they’re too clever,” he said. “It requires everything to line up just perfectly, and if all these bells and whistles line up just perfectly then we won’t need to turn to taxpayers again.”
Kashkari said he and his staff are gathering ideas on the matter and will release a set of proposals at the end of this year. “Not surprisingly, we have received significant criticism from big banks and their lobbyists who would like to discredit this important initiative,” he said.
Asked about the likely path of monetary policy, Kashkari advocated a wait-and-see approach to raising interest rates that moves away from the market’s obsessive focus with the exact timing of the next move.
“Given how people are so focused on that, I think it can be counterproductive,” he said.
The Fed has repeatedly been forced to backtrack on strong hints of upcoming interest rate increases as its forecasts for the economy have proven optimistic for several years running. The central bank raised interest rates by a quarter percentage point to a range of 0.25 to 0.50 percent in December but has since refrained from further moves.
Kashkari said low inflation, which has undershot the central bank’s 2 percent target for several years now, buys policymakers room and time to try to boost employment further given the deep damage caused by the Great Recession.
“My perspective is as long as inflation is coming up short, as long as we have a chance of putting Americans back into the labor force, we should do that, because there are huge benefits to society of putting people back to work,” he said.