Minneapolis Federal Reserve Bank president Neel Kashkari unveiled a plan to end systemic risk posed by U.S. banks—by forcing them to hold a massive amount of capital, as much as 38%.
Kashkari released the Minneapolis Plan Wednesday, a proposal to end the threat to the financial system posed by the potential failure of "too big to fail" banks, including JP Morgan, Citigroup, and Bank of America Merrill Lynch.
The report comes as a newly elected president, Donald Trump, is considering ways to pare back the massive 2010 Dodd Frank financial reform legislation.
Legislation to allow banks to avoid many of the most restrictive Dodd-Frank regulations by meeting higher capital thresholds has already been drafted.
Kashkari 's report could add support to that legislative effort.
Under what he called the Minneapolis plan, bank holding companies larger than US$250bn would be forced to hold common equity of 23.5% of risk-weighted assets excluding long-term debt.
Under Kashkari 's plan to reign in the largest banks, the U.S. Treasury Secretary would also be called on to certify that individual large banks are not too big to fail.
If the Secretary refuses to certify a large bank, that bank will be subject to an additional 5% capital charge per year, maxing out at 38%.
The cost of forcing banks to hold massive amounts of capital are substantial, Kashkari admits, up to 41% of GDP. For the US with a GDP of US$28trn, the cure may be worse than the disease.
Kashkari argues that the cost, while much higher than current regulations, is still lower than the cost of another financial crisis. He put the cost of a full blown banking crisis at 158% of GDP.
"Regulations can make the financial system safer, but they come with costs of potentially slower economic growth," Kashkari said speaking at the Economic Club of New York. "Ultimately, the public has to decide how much safety they want in order to protect society from future financial crises and what price they are willing to pay for that safety."
To prevent risk from simply migrating from highly regulated banks to so-called shadow banking, Kashkari recommends a 1.2%-2.2% tax on the debt of shadow banks, including hedge funds, mutual funds, and finance companies larger than US$50bn depending on whether they are deemed systemically risky.
If the plan were adopted there will be fewer mega banks and less concentration overall, Kashkari said.
"If there are any TBTF banks left, they will be so well-capitalized that their risk of failure will truly have been minimized."