Brookings Event with Minneapolis Fed President Kashkari on the Financial Crisis
Brookings Institution
“Neel Kashkari: Lessons from the Financial Crisis”
Tuesday, February 16, 2016
Key Topics & Takeaways
- Minneapolis Fed Initiative: Kashkari announced that the Federal Reserve Bank of Minneapolis is launching an initiative to develop a plan to end too-big-to-fail (TBTF) that will be released before the end of the year, which will include a series of policy symposiums held around the country to explore different options for ending TBTF.
- Ending Too-Big-To-Fail: Kashkari spoke of three transformational options that policymakers have not “seriously” considered: 1) breaking up the larger banks into smaller, less important entities; 2) turning the large banks into public utilities and force them to have enough capital that they cannot fail; and 3) taxing leverage throughout the financial system to reduce systemic risk.
- TLAC: Kohn questioned the total loss-absorbing capacity (TLAC) proposal, to which Kashkari asked why capital requirements should not just be increased for big banks.
Speakers
- Neel Kashkari, President, Federal Reserve Bank of Minneapolis
- David Wessel, Director, The Hutchins Center on Fiscal and Monetary Policy
- Donald Kohn, Senior Fellow, Economic Studies
- Gary Stern, Former President, Federal Reserve Bank of Minneapolis
Keynote Speaker
Neel Kashkari, President, Federal Reserve Bank of Minneapolis
Kashkari said that while he waited for implementation to decide if the Dodd Frank Act would end too-big-to-fail (TBTF), it “didn’t go far enough,” as banks are still TBTF and pose a large risk to the economy. He continued that the Federal Reserve Bank of Minneapolis is launching an initiative to develop a plan to end TBTF that will be released before the end of the year, which will include a series of policy symposiums held around the country to explore different options for ending TBTF.
Kashkari explained some of the tools regulators have for trying to eliminate TBTF, to include stress tests, living wills, and a resolution process that will allow regulators to restructure large banks, but he noted the need to “do more.” He continued that there is no “simple formula” for defining what is systemic, making it difficult to determine which firms are systemically important, and added that the externalities of big bank failures can be “catastrophic.” Referring to the different tools available to policymakers, Kashkari said that they would not be used in a “risky” or “crisis” environment, and the government would instead be forced to bail banks out again, and therefore more “transformational options” are needed.
Kashkari spoke of three transformational options that policy makers have not “seriously” considered: 1) breaking up the larger banks into smaller, less important entities; 2) turning the large banks into public utilities and force them to have enough capital that they cannot fail; and 3) taxing leverage throughout the financial system to reduce systemic risk. In regards to global institutions possibly having an advantage over U.S. institutions due to such stringent regulations, he explained that “if other countries want to take extreme risks…we can’t stop them,” but if they want to do business in the U.S., they will follow the local rules.
Panel Discussion
Tools for Ending TBTF
When asked if the Dodd-Frank Act ends TBTF, Kashkari replied that it has not “gone far enough,” and that the cost of failure is not just bailing the large banks out, but also the damage that is done to society. Donald Kohn, Senior Fellow of Economic Studies, disagreed with Kahkari and said that the authorities will use the new resolution regime “and it will work.” Gary Stern, former president of the Federal Reserve Bank of Minneapolis, agreed with Kohn, adding that the living will process is “key” and that the other tools have potential.
Kohn agreed and said the living will process “needs to work.” He then questioned the total loss-absorbing capacity (TLAC) proposal, to which Kashkari asked why capital requirements should not just be increased for big banks.
When asked if legislative authority is necessary, Kashkari replied that new legislation is needed for any of the transformation options, and that while breaking up banks is not the only solutions, “it’s one of the solutions.”
An audience member asked what the global implications would be if regulations made U.S. banks smaller and more controlled with massive capital requirements. Kashkari explained that an “ideal world” would have regulations stronger around the world, but until then the U.S. financial system needs to be sound, and if global banks want to do business locally, “they have to follow our rules.”
Congressional Assistance
An audience member opined that ending TBTF will require congressional action, to which Kashkari agreed, adding that the Minneapolis Fed is hoping Congress will participate in its policy symposiums later this year.
Global Impacts
When asked how other countries are dealing with the TBTF problem, Kashkari said that the U.S. is “further along.” Moderator David Wessel, Director of The Hutchins Center on Fiscal and Monetary Policy, explained that the Swiss require much more capital from their largest banks, and that the British have had conversations about restricting what banks are able to do. Kohn added that the U.K. has increased its capital requirements and is taking resolutions and the living wills “very seriously.”
In reference to whether the next crisis will be caused by a foreign market, Kohn explained that financial shocks can come from anywhere, and that “we won’t see it until it’s right on top of us.” He added that there is international cooperation in strengthening the banking system through the Basel Committee and the Financial Stability Board (FSB).
Impact on Small and Community Banks
Kashkari said that small banks and community banks are impacted by regulations focused on large banks, and he stressed the need to “relieve the burden.” Stern agreed that small and community banks should not be included with larger banks.
Debt Problems
An audience member asked if periods of very low inflation or deflation make the economy’s debt problem worse. Kashkari agreed, adding that the central banks are “committed to achieving inflation targets.”
Structural Change vs Monetary Policy
Audience member Ben Bernanke, former chairman of the Federal Reserve Board of Governors, asked the panelists if structural change would be better than monetary policy in meeting the Fed’s goals. Kashkari said it would be, and that if the financial system can be made stronger on its own, the burden on the monetary policy process is relieved. Kohn agreed that he would prefer to have structural change before monetary policy change.
Negative Interest Rates
When asked if negative interest rates would help or hinder the economy, Kashkari noted that while the Fed has the authority to use them, they “don’t need to.” Kohn added that the Fed is currently asking banks how capital would be affected with negative interest rates.
For more information on this event, please click here.
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Brookings Institution
“Neel Kashkari: Lessons from the Financial Crisis”
Tuesday, February 16, 2016
Key Topics & Takeaways
- Minneapolis Fed Initiative: Kashkari announced that the Federal Reserve Bank of Minneapolis is launching an initiative to develop a plan to end too-big-to-fail (TBTF) that will be released before the end of the year, which will include a series of policy symposiums held around the country to explore different options for ending TBTF.
- Ending Too-Big-To-Fail: Kashkari spoke of three transformational options that policymakers have not “seriously” considered: 1) breaking up the larger banks into smaller, less important entities; 2) turning the large banks into public utilities and force them to have enough capital that they cannot fail; and 3) taxing leverage throughout the financial system to reduce systemic risk.
- TLAC: Kohn questioned the total loss-absorbing capacity (TLAC) proposal, to which Kashkari asked why capital requirements should not just be increased for big banks.
Speakers
- Neel Kashkari, President, Federal Reserve Bank of Minneapolis
- David Wessel, Director, The Hutchins Center on Fiscal and Monetary Policy
- Donald Kohn, Senior Fellow, Economic Studies
- Gary Stern, Former President, Federal Reserve Bank of Minneapolis
Keynote Speaker
Neel Kashkari, President, Federal Reserve Bank of Minneapolis
Kashkari said that while he waited for implementation to decide if the Dodd Frank Act would end too-big-to-fail (TBTF), it “didn’t go far enough,” as banks are still TBTF and pose a large risk to the economy. He continued that the Federal Reserve Bank of Minneapolis is launching an initiative to develop a plan to end TBTF that will be released before the end of the year, which will include a series of policy symposiums held around the country to explore different options for ending TBTF.
Kashkari explained some of the tools regulators have for trying to eliminate TBTF, to include stress tests, living wills, and a resolution process that will allow regulators to restructure large banks, but he noted the need to “do more.” He continued that there is no “simple formula” for defining what is systemic, making it difficult to determine which firms are systemically important, and added that the externalities of big bank failures can be “catastrophic.” Referring to the different tools available to policymakers, Kashkari said that they would not be used in a “risky” or “crisis” environment, and the government would instead be forced to bail banks out again, and therefore more “transformational options” are needed.
Kashkari spoke of three transformational options that policy makers have not “seriously” considered: 1) breaking up the larger banks into smaller, less important entities; 2) turning the large banks into public utilities and force them to have enough capital that they cannot fail; and 3) taxing leverage throughout the financial system to reduce systemic risk. In regards to global institutions possibly having an advantage over U.S. institutions due to such stringent regulations, he explained that “if other countries want to take extreme risks…we can’t stop them,” but if they want to do business in the U.S., they will follow the local rules.
Panel Discussion
Tools for Ending TBTF
When asked if the Dodd-Frank Act ends TBTF, Kashkari replied that it has not “gone far enough,” and that the cost of failure is not just bailing the large banks out, but also the damage that is done to society. Donald Kohn, Senior Fellow of Economic Studies, disagreed with Kahkari and said that the authorities will use the new resolution regime “and it will work.” Gary Stern, former president of the Federal Reserve Bank of Minneapolis, agreed with Kohn, adding that the living will process is “key” and that the other tools have potential.
Kohn agreed and said the living will process “needs to work.” He then questioned the total loss-absorbing capacity (TLAC) proposal, to which Kashkari asked why capital requirements should not just be increased for big banks.
When asked if legislative authority is necessary, Kashkari replied that new legislation is needed for any of the transformation options, and that while breaking up banks is not the only solutions, “it’s one of the solutions.”
An audience member asked what the global implications would be if regulations made U.S. banks smaller and more controlled with massive capital requirements. Kashkari explained that an “ideal world” would have regulations stronger around the world, but until then the U.S. financial system needs to be sound, and if global banks want to do business locally, “they have to follow our rules.”
Congressional Assistance
An audience member opined that ending TBTF will require congressional action, to which Kashkari agreed, adding that the Minneapolis Fed is hoping Congress will participate in its policy symposiums later this year.
Global Impacts
When asked how other countries are dealing with the TBTF problem, Kashkari said that the U.S. is “further along.” Moderator David Wessel, Director of The Hutchins Center on Fiscal and Monetary Policy, explained that the Swiss require much more capital from their largest banks, and that the British have had conversations about restricting what banks are able to do. Kohn added that the U.K. has increased its capital requirements and is taking resolutions and the living wills “very seriously.”
In reference to whether the next crisis will be caused by a foreign market, Kohn explained that financial shocks can come from anywhere, and that “we won’t see it until it’s right on top of us.” He added that there is international cooperation in strengthening the banking system through the Basel Committee and the Financial Stability Board (FSB).
Impact on Small and Community Banks
Kashkari said that small banks and community banks are impacted by regulations focused on large banks, and he stressed the need to “relieve the burden.” Stern agreed that small and community banks should not be included with larger banks.
Debt Problems
An audience member asked if periods of very low inflation or deflation make the economy’s debt problem worse. Kashkari agreed, adding that the central banks are “committed to achieving inflation targets.”
Structural Change vs Monetary Policy
Audience member Ben Bernanke, former chairman of the Federal Reserve Board of Governors, asked the panelists if structural change would be better than monetary policy in meeting the Fed’s goals. Kashkari said it would be, and that if the financial system can be made stronger on its own, the burden on the monetary policy process is relieved. Kohn agreed that he would prefer to have structural change before monetary policy change.
Negative Interest Rates
When asked if negative interest rates would help or hinder the economy, Kashkari noted that while the Fed has the authority to use them, they “don’t need to.” Kohn added that the Fed is currently asking banks how capital would be affected with negative interest rates.
For more information on this event, please click here.