Fed's Kashkari playing long game in plan to end 'too big to fail'

WASHINGTON — Minneapolis Federal Reserve Bank President Neel Kashkari is realistic about the short-term prospects of his agency's recently finalized plan to eliminate "too big to fail" once and for all.

“We’re aware of the political environment we’re in; the winds are blowing against us,” Kashkari said in an interview with American Banker. “That doesn’t change the fact that I feel like our job is to identify risks to the economy, call them out and propose sensible solutions.”

The final plan was published early Wednesday and bears a close resemblance to the draft version the Fed published in November 2016, calling for much higher equity capital levels for banks with more than $250 billion in assets and far fewer regulations for banks with less than $10 billion in assets. The plan also calls for similarly high capital levels for shadow banks with more than $50 billion in assets and a certification process for the Treasury Department to declare a large bank as no longer too big to fail.

Kashkari said that in his meetings with member of Congress, there appears to be a wider base of support than is generally known for ending too big to fail and loosening capital and regulatory restrictions on community banks.

“I’ve talked with lots of members of Congress on both sides of the aisle, and almost everyone that I’ve met with agrees: We really need to address too big to fail, and we need to relax regulation on small banks that are not systemically risky, and the Minneapolis Plan does that,” Kashkari said. “If we allowed the political winds to discourage us from putting our ideas forward, then we wouldn’t be doing our jobs.”

He went on to say that, though some aspects of economic forecasting are inherently subjective, the analyses that led the Minneapolis Fed to conclude that a future crisis was likely and that existing capital buffers probably couldn’t prevent some kind of taxpayer intervention were sound. Though comments the agency received assailed the plan’s conclusions, he said, none were able to disprove the premise that the biggest banks require much higher capital to withstand a crisis.

“We literally wanted the best experts and the best critics to tear it apart, and what I’m really pleased with is they really couldn’t poke any holes in it,” Kashkari said. “We have a comment section, and we posted the Clearing House’s comments, which were very critical — they were just wrong. Their analysis was wrong, and we pointed out where their errors are. I feel like a consensus is now coming together, at least amongst the experts, that it is better for the American people if the biggest banks hold a lot more capital.”

The Clearing House Association declined to comment. The group, which represents many of the largest banks, published a blog last November that estimated that the Minneapolis plan would result in nearly $11.1 trillion in forgone economic growth.

Kashkari said that the Minneapolis Fed has sent the final plan to various staffers in the Trump administration, but has not received any response. Even if the plan faces a tough environment, however, he said that the public will eventually come around to the realization that higher capital levels for the biggest banks and a level playing field between banks and nonbanks is a critically important change. And if the public changes its mind, the plan will act as a readymade blueprint for how to implement those changes, he said.

“It will be out there, people will hopefully know about it, and it’s a body of work that is ready and done,” Kashkari said. “So if the moment opens when there is a cry for this type of plan, it’s ready.”