Remember When This Fed Official Said To Break Up The Big Banks?

Federal Reserve Bank of Minneapolis president Neel Kashkari spoke regarding the FOMC and the Federal Reserve System, offering a personal assessment of the "too big to fail" banking crisis.

In 2010, Kashkari was an adamant supporter of financial reform. At the time, despite his desires to see reform take place, he remained cautious. "I wanted to see the Act (the Dodd-Frank Act) implemented before I drew firm conclusions about whether it solved TBTF (too big to fail)," Kashkari explained.

Between 2010 and now, the Dodd-Frank Act has been implemented and the Congress-reformed framework has made steps toward resolving the TBTF issue. However, Kashkari believes the reforms "did not go far enough."

"I believe the biggest banks are still too big to fail and continue to pose a significant, ongoing risk to our economy. Enough time has passed that we better understand the causes of the crisis, and yet it is still fresh in our memories. Now is the right time for Congress to consider going further than Dodd-Frank with bold, transformational solutions to solve this problem once and for all," Kashkari exclaimed.

Related Link: Big Bank Investors Relieved With Dimon Purchase, Deutsche Bank Commentary

Looking Ahead

Based upon this opinion, Kashkari suggested a major initiative led by the Federal Reserve Bank of Minneapolis "to develop an actionable plan to end TBTF."

As part of this initiative, Kashkari hopes to deliver said actionable plan by the end of 2016.

Justifying his proposal, Kashkari stated, "We know markets make mistakes; that is unavoidable in an innovative economy. But these mistakes cannot be allowed to endanger the rest of the country. When roughly 1,000 savings and loans failed in the late 1980s, there was no risk of an economic collapse. When the technology bubble burst in 2000, it was very painful for Silicon Valley and for technology investors, but it did not represent a systemic risk to our economy.

"Large banks must similarly be able to make mistakes – even very big mistakes – without requiring taxpayers bailouts and without triggering widespread economic damage. That must be our goal."

After outlining his initiative and further support for his proposed steps, Kashkari took a look retrospectively and introspectively, assessing "where we are."

"Regulatory reforms since the crisis have focused both on making banks safer so they are less likely to fail, and on creating tools to resolve troubled banks by imposing losses on creditors without destabilizing the economy," Kashkari elaborated.

Building Off The Now Into The Future

Within the context of where he wishes to see the economy and where he gages the economy to be presently, Kashkari offered three options to make his vision a reality:

• 1. "Breaking up large banks into smaller, less connected, less important entities;
• 2. "Turning large banks into public utilities by forcing them to hold so much capital that they virtually can't fail (with regulation akin to that of a nuclear power plant);
• 3. "Taxing leverage throughout the financial system to reduce systemic risks wherever they lie."

Related Link: A Citigroup Breakup Would Yield 57%

What's Actually Happening

Tangible Results Ahead?

"Options such as these have been mentioned before, but in my view, policymakers and legislators have not yet seriously considered the need to implement them in the near term," Kashkari explained. "They are transformational – which can be unsettling."

In closing his speech, Kashkari outlined what is being done through the Federal Reserve Bank of Minneapolis to meet these goals.

"The Federal Reserve Bank of Minneapolis has been at the forefront of understanding the risks and challenges posed by large banks and moral hazard for a long time […] Starting in the spring, we will hold a series of policy symposiums to explore various options from expert researchers around the country. We will also invite leaders from policy and regulatory institutions and, yes, the financial industry to offer their views and to test one another's assumptions."

"Following the symposiums, we will publish a series of policy briefs […] We will use all of this work to inform our plan to end TBTF, which we will release by year-end for legislators, policymakers and the public to consider," Kashkari concluded.

In an earlier Benzinga article Monday, the potential benefits of breaking up a big bank were discussed.

Brian Kleinhanzl (Keefe, Buyette & Woods) analyzed what a split of Citigroup Inc C could provide. "We believe that Citi could be one of the only U.S. G-SIBs (global systemically important banks) that could successfully split up and this should unlock meaningful shareholder value," the analyst said.

"The anticipated benefits from restructuring should offer a meaningful return to shareholders d(57% return potential), and valuation multiples should improve over time since Citi post-split could return to meaningful growth as well," Kleinhanzl stated.

At time of writing…

• Citi was flat on the day at $43.54.
• Bank of America Corp BAC was up 0.47 percent at $13.85.
• JPMorgan Chase & Co. JPM was flat on the day at $60.46.
• Wells Fargo & Co WFC was up 0.22 percent at $50.60.