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Banking

Fed Gov. Powell: Too Big to Fail Reforms on Right Track

Fed Gov. PowellMuch of the regulatory reform effort since the financial crisis has been aimed at ending the practice of rescuing large financial institutions with public funds, or ending "too big to fail," but it is too early to judge success or failure of the efforts, Federal Reserve Governor Jerome Powell said in a recent speech at the Institute of International Bankers Washington Conference.

"The too-big-to-fail reform project is massive in scope. In my view, it holds real promise," Powell said. "But the project will take years to complete. Success is not assured." He added that he believes the efforts by U.S. and global regulators to fight too big to fail are by and large on the right track and should be allowed to proceed before resorting to more drastic measures such as breaking up the largest banks.

Still, the governor added, more intrusive reforms may ultimately be necessary. At the least, it is important to debate them and understand those alternatives in case the current reform project fails, Powell noted.

Drawing on lessons of the early 1990s
He focused his remarks on efforts to contain damage to the broad financial system and economy resulting from the failures of large financial firms. Powell recounted instances of financial stress during his time as a Treasury Department official in the administration of President George H.W. Bush. In a 1991 case, the Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation stepped in and expanded normal deposit insurance coverage to prevent a potential run on major banks. In another case, when a large investment bank was teetering, the regulators chose not to intervene and the bank did not fail.

Risk has grown with time
Since the early 1990s, the systemic risk that large institutions can pose has grown substantially, Powell pointed out, chiefly because of the enormous growth of the big firms. Since 1991, he said, the ratio of U.S. banking assets to the nation's annual gross domestic product has more than doubled, from 55 percent to 126 percent. Meantime, those assets have become more concentrated, as the share of assets held by the largest three institutions has increased from 14 to 32 percent.

"My own view is that the framework of current reforms is promising, and should be given time to work," the Fed governor said. "In any case, too big to fail must end, even if more intrusive measures prove necessary in the end."

March 28, 2013

 

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