filed under Finance | Good Ideas

Cutting Megabanks Down To Size By Taking In The Safety Net

3:39PM ON 01/30/2013
BY Beth Comery

bank My new favorite person is . . . a banker . . . from Texas! Richard W. Fisher, president of the Federal Reserve Bank of Dallas since 2005, spoke to a gathering in Washington D. C. about the problem of the still too-big-to-fail megabanks and how we can avoid further taxpayer-funded bailouts. New York Times financial writer Gretchen Morgenson recently discussed his prescription for straightening this mess out, and it is very easy to understand.

Fairness is at the heart of Mr. Fisher’s argument. Large institutions, he said, are “financial firms whose owners, managers and customers believe themselves to be exempt from the processes of bankruptcy and creative destruction.” In other words, small institutions must submit to the rigors of the free market. Those too big to fail do not. . .

Understanding that it will be a tough battle to break up the megabanks, Mr. Fisher suggests that in the meantime, only commercial banking operations receive protection from the federal safety net in the form of federal deposit insurance. An institution’s other activities — securities trading, insurance operations and real estate, for example — should fall outside any backstop. Furthermore, he recommends that these banks require customers and trading partners to sign an agreement stating that they understand the business they are conducting is not covered by any federal protection or guarantees.

This seems pretty simple and Fisher’s proposal has been favorably received on both sides of the aisle. Read the whole article. We can do this.

(Fun fact: Mr. Fisher’s son is actor Miles Fisher who played the preppy drug dealer on Season Three of “Mad Men.”)

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