Advertisement

Federal Reserve's Kashkari says banks 'still too big to fail'

 
Neel Kashkari became president of the Federal Reserve Bank of Minneapolis in January.
Neel Kashkari became president of the Federal Reserve Bank of Minneapolis in January.
Published Feb. 17, 2016

WASHINGTON — A top architect of the 2008 federal bailout of the financial industry said Tuesday that the government had not done enough to prevent a repeat.

Neel Kashkari, a Treasury Department official in the George W. Bush and Obama administrations and now president of the Federal Reserve Bank of Minneapolis, said it is time to think about measures including breaking up the largest banks.

"I believe the biggest banks are still too big to fail and continue to pose a significant, ongoing risk to our economy," Kashkari said at the Brookings Institution.

The speech caused a stir in Washington. Such views are common at both ends of the political spectrum — providing fuel for the presidential campaigns of Sen. Bernie Sanders, vying for the Democratic nomination, and Donald Trump, a Republican — but Kashkari is a moderate Republican and a former employee of Goldman Sachs.

It was also Kashkari's first speech in his new job, which he began in January.

"There are lines in your speech I can imagine a Bernie Sanders or Elizabeth Warren saying," David Wessel, a former journalist who moderated the Brookings event, told Kashkari during a panel discussion after the speech. "It's not what one expects."

Kashkari said that the Minneapolis Fed would begin a research effort to consider "more transformational measures" the government could pursue.

The first, most familiar option is forcing large banks to break apart, the approach favored by Sanders. Opponents argue that large banks are actually stronger in some ways.

A second possibility, Kashkari said, would be to greatly reduce the ability of banks to borrow money by increasing the share of funding they must raise in the form of capital.

A third, broader approach would impose a tax on borrowing throughout the financial system, reducing risk-taking not just by banks but a range of other financial intermediaries.

Kashkari's bleak assessment is not shared by some other Fed officials. For example, Donald L. Kohn, who worked with Kashkari during the crisis as the Fed's vice chairman, said that he did not share Kashkari's pessimism.