Federal Reserve Bank of Dallas President Richard Fisher called for an international pact to break up banks whose collapse would threaten the financial system — a position that goes beyond that of other Fed officials.
"The disagreeable but sound thing to do" with companies deemed "too big to fail" would be to "dismantle them over time into institutions that can be prudently managed and regulated across borders," Fisher said in a speech Wednesday at the Council on Foreign Relations in New York.
The Obama administration has proposed limiting banks' proprietary trading, while Fed Chairman Ben S. Bernanke is among officials who have called for a law to wind down failing financial companies. Such a move may still confer a "government-sponsored advantage" on the companies, Fisher said.
"Given the danger these institutions pose to spreading debilitating viruses throughout the financial world, my preference is for a more prophylactic approach: an international accord to break up these institutions into ones of more manageable size," Fisher said. "If we have to do this unilaterally, we should."
Fisher, a former fund manager and deputy trade representative who often speaks on international issues, said his views "may be slightly radical." The Dallas Fed president doesn't play a direct role in talks on financial regulation. The main officials involved in international talks involving major central banks are typically the Fed's chairman and vice chairman and the president of the New York Fed.
Fisher, who is 60, did not identify companies he would target for breaking up. The largest U.S. bank holding companies include Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Wells Fargo & Co. Those companies are supervised by Fed regional banks based in New York, San Francisco and Richmond, Va.
Fisher may find support from central bankers elsewhere. In a proposal the U.K. government immediately ruled out, Bank of England Gov. Mervyn King said in October that investment banks should be separated from operations that take deposits from consumers and manage payment systems. Swiss National Bank Chairman Philipp Hildebrand indicated in June, when he was vice chairman, that officials should be prepared to break up some banks if necessary.
Group of 20 policymakers have focused on drawing up so-called living wills, which would outline how banks and their international operations would be wound down in a crisis.
Fisher's stance aligns him more closely with lawmakers including Rep. Paul Kanjorski, a Pennsylvania Democrat who last year proposed letting the U.S. dismantle large companies.
In December the House passed Kanjorski's plan as part of financial overhaul legislation. The Senate Banking Committee may soon begin debating its own version of regulatory changes. Its chairman, Connecticut Democrat Chris Dodd, has said the government should have the power to break apart large companies "as a very last resort."
The 10 largest U.S. banks' share of the industry's assets has increased to 60% in 2009 from 44% in 2000 and about 25% in 1990, Fisher said.
"The existing rules and oversight are not up to the acute regulatory challenge imposed by the biggest banks," he said. "Because of their deep and wide connections to other banks and financial institutions, a few really big banks can send tidal waves of troubles through the financial system if they falter."