WASHINGTON — Former Federal Reserve Chairman Ben Bernanke defended post-crisis reforms and pushed back against calls to forcefully break up the biggest U.S. banks, but conceded that regulators should be willing to make necessary changes to avoid another financial crisis.
In a blog post Friday morning, Bernanke said firm conclusions about the largest banks' being "too big to fail" are difficult to draw, much less the conclusion that the Dodd-Frank Act and the Basel accords have failed to mitigate the risks. Instead, the reforms have put into place a process by which risk will be reduced in the financial system over time.
"While substantial and even fundamental changes may ultimately be necessary, we don't yet know exactly what they will be," Bernanke said. "Instead, the legacy of the Dodd-Frank Act, the Basel agreements, and other reforms is a sensible process which, with sustained effort, will help us solve the problem. A key element of the strategy is that it gives banks strong incentives to shrink or otherwise restructure themselves to reduce the risk they pose to the financial system."
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Advocates on the left and the right routinely assert that "too big to fail" is still with us and that Dodd-Frank and other post-crisis reforms have not secured the financial system from excessive risk, and the public seems to agree. So where does regulatory policy go from there?
April 27 -
Minneapolis Federal Reserve Bank President Neel Kashkari on Monday expanded on his views about the state of financial regulation while casting doubt on the "total loss absorbing capacity" concept for bailing in failed banks.
April 18 -
In a forum at the Federal Reserve Bank of Minneapolis aimed at examining progress made in ending the era of Too Big to Fail banks, academics engaged widely differing views on the nature of bank risk and how far regulators have come in addressing them since the crisis.
April 4
Bernanke went on to say that the forced breakup of the largest banks "doesn't seem like a smart way" to avoid another crisis, for a couple of reasons. First, any breakup based on asset size alone would be highly disruptive to the financial system and would relinquish any economic benefits that larger banks confer to the economy. Second, a fixation on asset size draws attention away from the real culprits in systemwide disruptions: loss of confidence, runs on funding, fire sales and disruption of credit.
"Factors other than size — including complexity, opacity, illiquidity, and interconnectedness with other firms — contributed to the catastrophic effects of Lehman's collapse, as did the fact that the government did not have the legal authorities it needed to manage Lehman's demise in a more orderly way," Bernanke said. "A more nuanced approach to ensuring financial stability and ending TBTF should take size into account, but other factors as well."
Bernanke's comments came days before the second of a series of symposia sponsored by the Federal Reserve Bank of Minneapolis on May 16 aimed at examining ways to end "too big to fail" in the banking system. Bernanke is among the scheduled speakers at the conference.
The symposia were announced in February by Minneapolis Fed President Neel Kashkari as part of a broad-based inquiry into how to be more sure that "too big to fail" has truly been eliminated from the financial system. Kashkari said that, in his view, not enough has been done since the crisis to end the problem, and that the largest banks should either be broken up or turned into financial utilities.
Bernanke is not the first to push back on those assumptions. Fed Chair Janet Yellen said during a
Banks have also been highly critical of the symposia, with most of the largest banks and their trade associations forgoing participation in the discussions. Greg Baer, president and chief executive of the Clearing House Association, said he is not participating because "it starts with premise that 'too big to fail' still exists, and that's not a premise that I agree with."