WASHINGTON — Richard Fisher took his fight against Too Big to Fail one step further Wednesday night, laying out a specific plan to dismantle the largest banks.

"In a nutshell, we recommend that TBTF financial institutions be restructured into multiple business entities," the president of the Federal Reserve Bank of Dallas said in a speech prepared for delivery at the National Press Club.

"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."

To reinforce the idea that the safety net only covers traditional commercial banks, Fisher would have "every customer, creditor and counterparty of every shadow banking affiliate and of the senior holding company" sign a disclosure statement acknowledging their investment is at risk.
Fisher also would restrict or even prohibit nonbank units from moving assets or liabilities into an affiliated bank. Fisher would extend this restructuring far beyond the handful of megabanks; he said 12 companies with 69% of total industry assets should be subject to such restructurings.

These companies "receive far too little regulatory and market discipline," Fisher said. Because they believe the government will not allow them to fail, "the management of TBTF banks can, to a large extent, choose to resist the advice and guidance of their bank supervisors' efforts to impose regulatory discipline."

Market discipline from shareholders and unsecured creditors also are limited, he said. The free-market capitalist conceded government intervention would be necessary.

"[E]ntrenched oligopoly forces, in combination with customer inertia, will likely only be overcome through government-sanctioned reorganization and restructuring of the TBTF" bank holding companies, he said.

"A subsidy, once given, is nearly impossible to take away. Thus, it appears we may need a push, using as little government intervention as possible to realign incentives, re-establish a competitive landscape and level the playing field."

Fisher, who has a flair for the dramatic, likened the "repression" large banks impose on taxpayers to the way England treated the American colonies.

"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,' " Fisher said. "I submit that these institutions, as a result of their privileged status, exact an unfair tax upon the American people."

Taming TBTF is not a new topic for Fisher. He's been warning about the risks posed by large banks since mid-2009. But even as recently as last May he steered clear of proposing a solution.

"I'm not going to make specific proposals," he told American Banker in May.

"I think the risk being run there is you might state a bias or stifle creative minds that are likely to come up with creative solutions. Why don't we see what comes out?"

He's changed his tune a bit by endorsing the ring-fencing of commercial banks. And a paper the Dallas Fed released Thursday broaches the idea of putting a size cap on the largest banks.

In his speech, Fisher said the report will also detail the "superior relative performance of community banks during the recent crisis and how they are being victimized by excessive regulation that stems from responses to the sins of their behemoth counterparts."

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