MNI POLICY: Fed's Kashkari Says Banks Still Too Big to Fail

U.S. banks are still too big to fail and should be pressured to maintain higher capital levels, Minneapolis Fed President Neel Kashkari and a former Treasury official during the financial crisis a decade ago, said Friday.

"Large, unacceptable risks remain" he said in remarks to the Council of Institutional Investors Conference. "Large banks in America today are still too big to fail, and their capital levels are not high enough to balance the benefits society gains from their scale with the risks they pose to the economy."

Banks would need to increase equity to 24% of risk-weighted assets from today's 13% to make sure they can cover losses, he said. The Covid-19 pandemic also signals the risk that banks are taking in relying on public support for future bailouts, even as Congressional checks sent to households were an indirect lifeline to banks facing customers who couldn't pay their bills.

"Will there even be the political will to continue to support Americans who've lost their jobs because of COVID-19? I hope so. Is betting on successful future bailouts a sensible risk for your members? I would argue the answer is a resounding no," Kashkari said.

The failures in overnight funding markets this year also need further investigation, he said, and it's fair to question whether this system really benefits the public over banks seeking to pick up a quick few basis points of profits. "The solution to fragile funding markets is less obvious but also important," he said.

Banks often resist the need for tougher regulation, but there is little merit to their argument that making banking safer would come at the cost of restricting everyday loans to American companies and families, he said.

"Up until COVID-19 hit, they were buying back billions of dollars of their stock each year. In fact, combined, the eight largest global banks headquartered in the United States bought back more than $110 billion of stock in 2019 alone. If capital was constraining lending, why were they buying back their stock? It is nonsense."