Richard Fisher's Plan of 2013
HOW IT CAME TO BE?
While the Dodd-Frank Wall Street Reform and Consumer Protection Act has been in effect since 2010, there is no guarantee that taxpayer-funded bailouts of financial institutions deemed systemically "Too Big to Fail" are a thing of the past. The current operating method of "Too Big to Fail" institutions is that they can take excessive risks that drive revenue growth, without regard for risk management and market discipline. Executives and shareholders benefit from the upside (and all bank bond holders were bailed out in 2008), while taxpayers bear the burden on the downside. Many view Dodd-Frank's 2,319 page "work in progress" as ineffective, burdensome, difficult to interpret (even for regulators), and the costs are prohibitive to banking institutions that are not "Too Big to Fail".
Richard W. Fisher, then president of the Federal Reserve Bank of Dallas, outlined the problem and proposed a plan before the Committee on Financial Services, U.S. House of Representatives Hearing on "Examining How the Dodd-Frank Act Could Result in More Taxpayer-Funded Bailouts". The speech titled "Correcting ‘Dodd-Frank’ to Actually End ‘Too Big to Fail’" was delivered in Washington, D.C. on June 26, 2013.
What does it do?
Richard Fisher's three pronged plan entails breaking those financial institutions deemed "Too Big to Fail" into smaller pieces, so that in the case of crisis, no single institution could bring down the entire financial system and economy.
First, the Federal safety net (including deposit insurance and access to the Federal Reserve's discount window) would be clearly allocated to only traditional commercial banks - not nonbank affiliates of bank holding companies or the holding companies themselves.
Below is a simple graphic of Mr. Fisher's proposed basic organizational structure for a typical financial holding company.
Second, a clear, legally binding disclosure would be signed by customers, creditors and counterparties of all nonbank affiliates and the parent holding companies acknowledging and accepting awareness that their investments are not guaranteed by the government.
Finally, all corporate entities of the largest financial holding companies will be restructured to ensure a speedy bankruptcy process. Those banking entities would be downsized to an appropriate size, complexity and geographic footprint, rendering them "too small to save."
All banks would be subject to regulatory oversight.
The goal is financial stability, transparency, a return of marketplace discipline, principles of fair and open competition, and a level playing field for all.
WHAT HAPPENED?
Fisher's plan is very straightforward, would protect U.S. Taxpayers and is decidedly nonpartisan. Therefore, this plan was very favorably received by Congress. Unfortunately, as with so many other sound plans brought before that body in recent years, its adoption appears not to have meaningfully advanced.
THE BETTER BANKING LAW VIEW:
We at Better Banking Law are whole heartedly supportive of Richard Fisher's Plan. However, sometimes the perfect can be the enemy of the good. Our plan is not as far reaching as Mr. Fisher's, in that ours does not require the breaking up of the "Too Big to Fail" banks, but does require unbreachable firewalls between the Federally insured banking subsidiary of the bank holding company and it's investment banking subsidiaries. Should Congress adopt Mr. Fisher's plan, we would certainly applaud that action. But if they balked at the breakup aspect, we would settle for our firewall solution, rather than the continuation of the very dangerous status quo.