Banks that are seen as too large to fail should be broken up in order to make the financial system more stable, Dallas Federal Reserve President Richard Fisher said on Wednesday.
In his most explicit call yet for reshaping the financial industry, Fisher said markets could only function properly if institutions that take big risks are allowed to go under.
His comments come as Washington debates financial regulatory reform, which some analysts worry has become too watered down to prevent another financial crisis. Fisher called for an international agreement to break up oversized firms.
The disagreeable but sound thing to do regarding institutions that are too big to fail is to dismantle them over time into institutions that can be prudently managed and regulated across borders, Fisher said in prepared remarks to the Council on Foreign Relations.
One prominent proposal for reform, known as the Volcker rule after Paul Volcker, the former Fed chairman and White House economics adviser who devised it, would limit taxpayer backing for banks whose primary activities are speculative in nature.
I align myself closer to Paul Volcker in this argument and would say that if we have to (break up banks) unilaterally, we should, Fisher said.
He said the arguments for maintaining the current system, which include sustaining the global competitiveness of U.S. financial firms, is weak at best, citing Japan's experience.
Fisher used the forum to add his voice to the chorus of Fed officials vying to maintain the central bank's regulatory authority, which has come under threat from key proposals in Congress.
Some lawmakers have criticized the Fed for being too hands-off in its approach to supervision, thereby allowing troubles to fester that eventually led to the worst crisis since the Great Depression.
But central bank officials, while admitting to some past mistakes, say they have learned their lessons and are becoming more proactive about measuring not only risks to specific institutions but also those to the broader financial system.
Fisher, like colleagues at the Fed, argued that supervisory authority is key to the adequate conduct of monetary policy, since it gives policy makers a bird's eye view of financial markets.
We depend on our regulatory arm to provide in-depth, hands-on assessments to guide us as we perform our duty as the lender of last resort, Fisher said.
Fisher, who did not comment directly on the economic outlook or on monetary policy, also reiterated his calls for insulating the central bank from political pressures.