Fisher: Regulators should split 'behemoth' banks

A Bloomberg article reports that Dallas Fed President Richard Fisher would like regulators to break-up the too big to fail banks.

The question is how?

Regular readers know that your humble blogger's solution is by requiring these firms to disclose their current asset, liability and off-balance sheet exposure detail.

With this disclosure, market participants can exercise discipline to get management to reduce the bank's risk profile.

There is a positive feedback loop for banks that elect to reduce their risk.  They will see their cost of financing decline.  This increases both the profitability of the bank and its stock price.

Conversely, banks that elect to increase their risk to boost their earnings will experience a negative feedback loop.  These banks will see their cost of financing increases.  This reduces both the profitability of the bank and its stock price.

Rather than regulators telling the banks how to reduce their risk, management gets to choose how it reduces its risk profile.

Federal Reserve Bank of Dallas President Richard Fisher said regulators should break up so- called too-big-to-fail financial institutions to curtail the risk they pose to financial stability. 

“I believe that too-big-to-fail banks are too-dangerous- to-permit,” Fisher said in the text of remarks given in New York today. “Downsizing the behemoths over time into institutions that can be prudently managed and regulated across borders is the appropriate policy response. 

Then, creative destruction can work its wonders in the financial sector, just as it does elsewhere in our economy.” 

Regulators in the U.S. and abroad have attempted to address the risks posed by such systemically important financial institutions, and if “properly implemented,” the Dodd-Frank overhaul legislation “might assist in reining in the pernicious threat to financial stability,” Fisher said. ...

Fisher said the banking industry has “become more concentrated,” with five institutions’ assets comprising half the industry’s. The assets of the 10 biggest depository institutions make up 65 percent of the banking industry’s assets and comprise three quarters of our nation’s gross domestic product, he said. 

“Sustaining too-big-to-fail-ism and maintaining the cocoon of protection of SIFIs is counterproductive, expensive and socially questionable,” Fisher said. “Perhaps the financial equivalent of irreversible lap-band or gastric bypass surgery is the only way to treat the pathology of financial obesity, contain the relentless expansion of these banks and downsize them to manageable proportions.”