(Adds context on crisis, quotes, comments on FSOC)
By Richard Valdmanis
CAMBRIDGE, Mass, July 10 The Federal Reserve's
new vice chair all but dismissed the idea of breaking up the
largest U.S. banks, saying on Thursday it is unclear that such a
complex task would help stabilize the country's financial
In his most detailed speech on financial regulation since
becoming the Fed's No. 2 official, Stanley Fischer also floated
the idea of adding a financial stability mandate to all of the
U.S. regulators under the umbrella of the Financial Stability
Oversight Council (FSOC), a coordinating committee.
Fischer, a former governor of the Bank of Israel, was
careful to hedge his comments on what more was left for
regulators to do following the 2007-2009 financial crisis,
borrowing heavily from published papers on the politically
Addressing the lingering problem of too-big-to-fail banks -
those that benefit from the public assumption that the
government will do whatever is needed to protect them in times
of crisis - Fischer said the Fed and other regulators must not
become complacent, because more work is necessary.
But he said it is "not clear" that breaking up the largest
banks would end the need for future government bailouts,
pointing out that bankrupt investment bank Lehman Brothers was
not a U.S. financial giant and arguing that the savings and loan
crisis of the 1980s and '90s was due to small firms "behaving
"In short, actively breaking up the largest banks would be a
very complex task, with uncertain payoff," Fischer said in a
speech to the National Bureau of Economic Research.
Fischer, who was sworn in as Fed vice chair last month, said
that big, complex banks are less likely to be stable the more
they reply on interest-rate-sensitive, short-term funding.
Some politicians and even regulators, such as the president
of the Dallas Fed, Richard Fisher, have urged new rules that
would in effect shrink or break up too-big-to-fail banks.
But in general the Fed and other regulators have shied away
from the idea, pointing instead to new rules that require banks
to reduce leverage, maintain a supply of assets they could sell
quickly, and stop making risky trades with their own money.
LOOKING AT WIDER STABILITY MANDATE
A widely respected economist with extensive policymaking
experience, Fischer is expected to play an influential role in
helping to shape U.S. monetary and regulatory policy, and could
prove a powerful ally of Fed Chair Janet Yellen.
Yellen last week said that regulation was the primary tool
to prevent financial instabilities, with monetary policy a
distant backup. Fischer, while careful to avoid addressing the
question head on, cited some limitations in using targeted rules
to deal with imbalances.
An unfettered bubble in the U.S. mortgage market last decade
led to the financial crisis and global recession, a grim period
that saw banks collapse and governments and central banks
scramble to prevent a new Great Depression.
Fischer praised the progress since then in making Wall
Street safer, but added: "Unfortunately, we are still dealing
with the consequences of the collapse and the steps necessary to
deal with it."
Addressing the FSOC, which was formed to take a holistic
view of financial stability, Fischer said reforms suggested by
former Fed Vice Chair Donald Kohn warrant "serious" examination.
He suggested that some U.S. agencies should also have a mandate
to consider how their own regulatory bailiwick affects the
stability of the entire financial system.
"It may well be that adding a financial stability mandate to
the overall mandates of all financial regulatory bodies, and
perhaps other changes that would give more authority to a
reformed FSOC, would contribute to increasing financial and
economic stability," Fischer said.
The FSOC brings together nine U.S. agencies, among which are
the Securities and Exchange Commission and the Commodity Futures
Trading Commission, both of which, for example, do not have such
a financial stability mandate.
Fischer did not comment directly on monetary policy or
(Reporting by Richard Valdmanis; Writing by Jonathan Spicer;
Editing by Leslie Adler)