Fed Official Advocates Big Bank Break Up

Breaking up may be hard to do … but, sometimes, it’s necessary.

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said on Tuesday (Feb. 16) that regulators should ponder whether the biggest players in the financial services realm should be broken up. That action, he said, may do much to prevent the financial system from going through a crisis much like the one that preceded the Great Recession.

As Bloomberg reported, Kashkari, a former U.S. Treasury official who was deeply involved in the bailout of 2008, primarily through the creation and administration of the Troubled Asset Relief Program, said that his own regional bank will examine how banking laws can be boosted to help stave off some of the issues that were seen in 2008. Among the options: cleaving banks, especially the largest ones that have been marked by “so much capital that they virtually can’t fail” and creating new legislation. Thus far, those sentiments have not yet been echoed by his Fed peers, and any real banking breakups would encounter stiff resistance from Congress, currently Republican-led.

In the meantime, Kashkari said, his Fed will gather input through data and events and will offer banking industry-related proposals by the end of the year.

In his remarks, the former Treasury official and Goldman Sachs employee likened the banking industry to a nuclear reactor. “The cost to society of letting a reactor melt down is astronomical. Given that cost, governments will do whatever they can to stabilize the reactor before they lose control.”

The Fed’s Janet Yellen said in testimony delivered to Congress earlier this year that regulations that took shape after the financial crisis show “very substantial payoffs in the form of a much more resilient and stronger, better capitalized, more liquid banking system.”