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Dallas Fed_why We Must End Too Big to Fail

Dallas Fed_why We Must End Too Big to Fail

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Published by TA Webster

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Published by: TA Webster on Mar 26, 2012
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Choosing the Road to Prosperity
Why We Must End Too Big to Fail—Now
CONTENTSLetter rom the President 1Choosing the Road to Prosperity 2Year in Review 24Senior Management, Ofcers and Advisory Councils 26Boards o Directors 28Financial/Audit 32
The too-big-to-ail institutions that amplifed and prolongedthe recent fnancial crisis remain a hindrance to ulleconomic recovery and to the very ideal o Americancapitalism. It is imperative that we end TBTF.
Letter rom the
 you are running one o the “too-big-to-ail” (BF) banks
alternativelyknown as “systemically importantnancial institutions,” or SIFIs
I doubt youare going to like what you read in this annualreport essay written by Harvey Rosenblum, thehead o the Dallas Fed’s Research Department,a highly regarded Federal Reserve veteran o 40years and the ormer president o the NationalAssociation or Business Economics.Memory ades with the passage o time.Yet it is important to recall that it was in recog-nition o the precarious position in which theBF banks and SIFIs placed our economy in2008 that the U.S. Congress passed into law theDodd–Frank Wall Street Reorm and ConsumerProtection Act (Dodd–Frank). While the actestablished a number o new macroprudentialeatures to help promote nancial stability, itsoverarching purpose, as stated unambiguouslyin its preamble, is ending BF.However, Dodd–Frank does not eradi-cate BF. Indeed, it is our view at the DallasFed that it may actually perpetuate an alreadydangerous trend o increasing banking industryconcentration. More than hal o bankingindustry assets are on the books o just veinstitutions. Te top 10 banks now accountor 61 percent o commercial banking assets,substantially more than the 26 percent o only20 years ago; their combined assets equate tohal o our nation’s GDP. Further, as Rosenblumargues in his essay, there are signs that Dodd–Frank’s complexity and opaqueness may evenbe working against the economic recovery.In addition to remaining a lingering threatto nancial stability, these megabanks signi-cantly hamper the Federal Reserve’s ability toproperly conduct monetary policy. Tey were aprimary culprit in magniying the nancial crisis,and their presence continues to play an impor-tant role in prolonging our economic malaise.Tere are good reasons why this recoveryhas remained rustratingly slow compared withperiods ollowing previous recessions, and Ibelieve it has very little to do with the FederalReserve. Since the onset o the Great Recession,we have undertaken a number o initiatives
some orthodox, some not
to revive andkick-start the economy. As I like to say, we’velled the tank with plenty o cheap, high-octanegasoline. But as any mechanic can tell you, ittakes more than just gas to propel a car.Te lackluster nature o the recovery iscertainly the byproduct o the debt-inusedboom that preceded the Great Recession, asis the excessive uncertainty surrounding theactions
or rather, inactions
o our scal au-thorities in Washington. But to borrow an anal-ogy Rosenblum crated, i there is sludge on thecrankshat
in the orm o losses and bad loanson the balance sheets o the BF banks
thenthe bank-capital linkage that greases the engineo monetary policy does not unction properly todrive the real economy. No amount o liquidityprovided by the Federal Reserve can change this.Perhaps the most damaging eect o prop-agating BF is the erosion o aith in Americancapitalism. Diverse groups ranging rom theOccupy Wall Street movement to the ea Partyargue that government-assisted bailouts o reckless nancial institutions are sociologicallyand politically oensive. From an economicperspective, these bailouts are certainly harmulto the ecient workings o the market.I encourage you to read the ollowingessay. Te BF institutions that amplied andprolonged the recent nancial crisis remain ahindrance to ull economic recovery and to thevery ideal o American capitalism. It is impera-tive that we end BF. In my view, downsizingthe behemoths over time into institutions thatcan be prudently managed and regulated acrossborders is the appropriate policy response. Onlythen can the process o “creative destruction”—which America has perected and practicedwith such eectiveness that it led our countryto unprecedented economic achievement—work its wonders in the nancial sector, just asit does elsewhere in our economy. Only thenwill we have a nancial system t and properor serving as the lubricant or an economy asdynamic as that o the United States.
Richard W. Fisher
Federal reserve Bank oF dallas 2011 annual report

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