Minneapolis Fed Requests Comments on Plan to End “Too Big to Fail”

The Federal Reserve Bank of Minneapolis (“Minneapolis Fed”) requested comments on its proposed “Minneapolis Plan to End Too Big to Fail” (the “Plan”).

In the Plan, the Minneapolis Fed proposed:

  • requiring covered banks to issue common equity equal to 23.5 percent of risk-weighted assets, with a corresponding leverage ratio of 15 percent, in order to “dramatically increase common equity capital” and “substantially reduce the chance of bailouts”;
  • calling on the U.S. Treasury Secretary to either certify that covered banks are no longer systemically important or subject those banks to an additional 5 percent of risk-weighted assets per year until (i) the Treasury certifies them as no longer systemically important, or (ii) the banks’ capital reaches 38 percent, which the Minneapolis Fed reports is the “level of capital that reduces the 100-year chance of a crisis below 10 percent”;
  • levying a shadow bank tax in order to discourage banking activity from moving to the shadow banking sector, which would equalize funding costs between the two sectors; and
  • allowing the government to reform the current supervision and regulation of community banks by adopting a system that is “simpler and less burdensome while maintaining [the government’s] ability to identify and address bank risk-taking that threatens solvency.”

Because the Plan’s approach could result in “the migration of risky activity from the banking sector to nonbank financial firms, where capital requirements are lower, if they exist at all,” it explained, the Minneapolis Fed proposed to “address this unequal treatment across sectors by taxing the borrowings of large nonbank financial firms – also known as shadow banks.” Effectively, this tax would “make the cost of funds roughly equivalent between large banks and nonbanks.”

The Minneapolis Fed requested feedback on all aspects of the Plan by January 17, 2017.

Lofchie Comment: The Minneapolis Fed’s Plan would attempt to end the problem of too-big-to-fail by driving every large bank out of business through the imposition of massive capital charges. Since putting large banks out of business would cause borrowing activity to move from banks to non-banks, the plan would then impose a tax on large non-bank lenders that effectively would force every large non-bank lender to either become a bank (presumably a small bank, since large banks would be compelled to close) or cease operations.

Since the likely effect of the Plan on the economy of the United States would be significant, the Minnesota Fed might find it useful to project what it believes the Plan’s effects would be and why. It also might be useful for the Minnesota Fed to ask itself (i) if there would be any large banks left, (ii) if there would be any large non-bank lenders left, (iii) how many banks would remain overall, (iv) what effect the Plan would have on the U.S. economy, and (v) whether it is troubling that the Plan effectively would force all large moneylenders to become banks.