Minneapolis Fed chief: U.S. needs to guard against failure of giant banks

A Minnesota banking official continues to stir debate about whether banks have grown too large. Minneapolis Federal Reserve President Neel Kashkari believes not enough has been done to protect the country should one or more of the nation's megabanks face failure.

But there was no consensus at a conference Monday on what actions to take or even that banks are too big.

Kashkari argues banks that were too big for regulators to let fail in the past have only grown bigger. But in convening economists and regulators in Minneapolis to mull what should be done about big banks, the Minneapolis Federal Reserve president intentionally invited people with divergent views.

There's still disagreement over how much banks should be allowed to risk, and whether laws already in place are enough to prevent another crisis that took down the economy in 2008.

Proposed fixes included requiring bank owners to put more of their own money at risk and keeping more money in reserve should a bank run into trouble.

Several experts said some banks are simply too big to be allowed to fail and should be downsized.

The banks of particular concern were those with more than $1 trillion in assets — JPMorgan Chase, Bank of America, Citibank and Wells Fargo.

MIT professor Simon Johnson said the damage that could be caused by the failure of megabanks would be catastrophic.

"If the Federal Reserve allows this financial system to continue in its current form, you're putting the economy in jeopardy," Johnson said. "You're putting the financial system in jeopardy and you're putting yourself, the Federal Reserve System, directly in the line of political fire next time."

But University of California at Berkeley professor Ross Levine said breaking up the biggest banks could backfire.

"Breaking up the big banks might hurt the services that are provided by banks whether it's economies of scale or economies of scope," he said.

Others think shrinking the nation's megabanks could hurt U.S. multinationals like Minnesota-based 3M, which does most of its business overseas.

"What are the ramifications for global businesses with no large U.S. banks?" said economist Aaron Klein, with the Brookings Institution. "One, they use a lot of small banks, probably more costly. So if you want to drive down 3M profits and up profits for the agglomerated banking industry, that would be a ramification. I'm kind of against that."

Kashkari said he invited representatives from big banks but none chose to attend.

"Instead, they're writing op-eds and editorials saying that their voices aren't being heard or they aren't part of the process," he said. "Well, they're not part of process because they declined to be part of a process. I'm glad they're taking this as seriously as they are. It means that they're scared."

Kashkari plans additional forums on the too-big-to-fail issue for later this year. The former head of the bank bailout program in 2008 says the Minneapolis Federal Reserve will draft a proposed plan of action but it will be up to the public and Congress to decide if it makes sense to execute.