NEW YORK (Reuters) - A fresh Federal Reserve study highlights the inability of U.S. law to protect Americans from underwriting the risky activities of “too-big-to-fail” banks, a top Fed policymaker said on Tuesday.
Dallas Fed President Richard Fisher, who has long warned of the economic risks posed by massive banks, said in an interview the series of papers by New York Fed economists shows “it is improper to ask the taxpayer to underwrite the non-commercial banking operations of a complex bank holding company.”
The landmark study, published earlier on Tuesday, found that large U.S. banks enjoy a so-called too-big-to-fail advantage in financial markets, including cheaper funding and operating costs, confirming the suspicions of many Wall Street critics more than five years after the financial crisis.
“These studies are extremely thoughtful, they are a contribution, and they point out the limits of current established law,” Fisher told Reuters via telephone.
Critics warn that the 2010 Dodd-Frank law did not go far enough to trim banks deemed so big that a collapse of one would imperil the broader U.S. economy, as they did the fall of Lehman Brothers in 2008.
Fisher has argued that such banks should be effectively shrunk by legislation that states that public funds will not be used to bail them out if they get into trouble, beyond securing their depositors. While there is some support for this in Washington, most regulators say the too-big-to-fail problem will be solved once Dodd-Frank is fully implemented.
The series of research papers “doesn’t change my argument and in fact it will bolster the arguments of those concerned ... that the current structure of what Dodd-Frank prescribed does not do the trick,” Fisher said.
Pointing to the Dallas Fed’s southern U.S. district, he said big banks are doing “hyper aggressive” marketing of pricing and coverage of products that smaller, regional institutions feel “are not prudent loans.” He did not name banks or elaborate on the financial products, but said, “I’m seeing it.”
Reporting by Jonathan Spicer; Editing by Andrea Ricci