Current and former Fed officials urge greater efforts against risky big bank practices

In the past week, two leading Fed officials issued stark warnings against risky practices of the big banks and called for greater oversight. Both Professor Alan Blinder, a former vice-chair of the Federal Reserve, and Richard Fisher, the current Dallas Fed president, called for solutions that match U.S. PIRG's reform platform.

In the past week, two notable Fed insiders issued stark warnings against risky practices of the big banks.  Both Alan Blinder, now a professor but a former vice-chair of the Federal Reserve, and Richard Fisher, the current Dallas Fed president, called for greater oversight. In Fisher’s case, he especially emphasized restricting banks that are still considered “too big to fail.” Their reform prescriptions match U.S. PIRG’s Wall Street reform platform.

Professor Blinder, in an op-ed in the New York Times titled “Financial Collapse: A 10-Step Recovery Plan,” argues that self-regulation is not enough, that risky derivatives must be simplified and traded on transparent exchanges and “that failure to protect unsophisticated consumers from financial predators can undermine the whole economy.” He reminds us that we cannot forget such a lesson: “The Consumer Financial Protection Bureau [that Blinder link is to more NYT stories on the CFPB] should institutionalize it.” Blinder also calls for less use of leverage and elimination of “perverse” compensation systems: “Offering traders monumental rewards for success, but a mere slap on the wrist for failure, encourages them to take excessive risks.”

U.S. PIRG certainly agrees. Yet, a phalanx of industry lobbyists is camped outside both the agencies and the Congress. Instead of further safety implementation, it seeks rollbacks to those Wall Street reforms that both Blinder and U.S. PIRG want maintained and even strengthened. U.S. PIRG stands with Blinder; we have consistently urged the regulators to stand firm. At the same time we have urged the Congress not to weaken the regulators’ powers nor take away their funding.

Meanwhile, Richard Fisher of the Dallas Fed, in a speech in Washington, DC called “Ending ‘Too Big to Fail’: A Proposal for Reform Before It’s Too Late,” subtitled “(With Reference to Patrick Henry, Complexity and Reality),” said, quoting Henry:

“This is no time for ceremony … [it] is one of awful moment to this country.” Patrick Henry was addressing the repression of the American colonies by the British crown. Tonight, I wish to speak to a different kind of repression—the injustice of being held hostage to large financial institutions considered “too big to fail,” or TBTF for short. […] [the Wall Street reform law known as] Dodd–Frank does not do enough to constrain the behemoth banks’ advantages. Indeed, given its complexity, it unwittingly exacerbates them.”

He goes on to recommend that the 12 largest “mega-banks” be restructured and downsized and that it be made be clear that the federal safety net (both deposit insurance and access to other Federal Reserve benefits) only applies to their commercial banking operations, effectively reinstating a 21st Century version of the post-1929 Glass-Steagall wall between commercial and investment banking.

“In a nutshell, we recommend that TBTF financial institutions be restructured into multiple business entities. Only the resulting downsized commercial banking operations—and not shadow banking affiliates or the parent company—would benefit from the safety net of federal deposit insurance and access to the Federal Reserve’s discount window.”

Over at the New York Times, financial columnist Gretchen Morgenson discusses the importance of Fisher’s 21st Century approach in her column “How to Cut Megabanks Down to Size:”

“But Mr. Fisher’s plan is more sophisticated than Glass-Steagall, in that it recognizes how complex big financial institutions have become. Glass-Steagall concerned only old-school banking businesses, like making loans, and Wall Street businesses, like trading stocks. Today’s financial behemoths are in so many different businesses that a top-to-bottom restructuring is required.”

We agree that Dodd-Frank could have done more to minimize risks from the very small number of mega-banks, which have continued to grow. Although strengthening amendments to the Dodd-Frank Act to limit their size and complexity were defeated or blocked on procedural grounds, there is growing bi-partisan support for breaking up or restructuring the big banks so that the financial system and taxpayers will be better protected.

In December, the Senate passed a community bank-backed provision requiring the Government Accounting Office to study too-big-to-fail; it was sponsored by Sens. Sherrod Brown (D-OH) and David Vitter (R-LA). The GAO has agreed to do the study even though the bill only passed the Senate. There are other conservative voices arguing for greater structural reforms of the big banks. The recently confirmed FDIC vice-chairman, Thomas Hoenig, himself a former regional Fed bank chief, is one of the leading proponents of breaking up the big banks and has long had strong support from conservative Senators including both Richard Shelby (R-AL) and Mitch McConnell (R-KY).

It is encouraging that support for further regulation of the biggest banks, including structural reforms and breakups, is gaining bi-partisan support. The financial system and economy are still recovering from the 2008 collapse brought on by risky practices that resulted in bailing out the biggest banks. Taxpayers and consumers shouldn’t have to shoulder that burden again.


Ed Mierzwinski

Senior Director, Federal Consumer Program, PIRG

Ed oversees U.S. PIRG’s federal consumer program, helping to lead national efforts to improve consumer credit reporting laws, identity theft protections, product safety regulations and more. Ed is co-founder and continuing leader of the coalition, Americans For Financial Reform, which fought for the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, including as its centerpiece the Consumer Financial Protection Bureau. He was awarded the Consumer Federation of America's Esther Peterson Consumer Service Award in 2006, Privacy International's Brandeis Award in 2003, and numerous annual "Top Lobbyist" awards from The Hill and other outlets. Ed lives in Virginia, and on weekends he enjoys biking with friends on the many local bicycle trails.