Minneapolis Fed President Neel Kashkari signaled Thursday that he’s still worried about the danger the nation’s biggest banks will pose if they get into financial trouble.
In a question-and-answer session on the Twitter messaging platform, Kashkari fielded more than a dozen questions about inflation and jobs, the key factors that influence the central bank’s decisions on interest rates. But when he was asked what he would do if he could “magically add any tool to the Fed’s tool chest,” he replied, “Much higher capital requirements for giant banks.”
As a Treasury official during the Bush administration in 2008 and 2009, Kashkari oversaw the bank bailout program known as TARP. During his first year at the Minneapolis Fed in 2016, he asked the bank’s researchers to study how the biggest banks had progressed in safeguarding themselves from the dangers that existed in 2008.
The bank concluded that research with a proposal that the largest U.S. banks, sometimes called systemically important or too big to fail, back themselves up with less debt and far more of their own money. Since it would be difficult to meet the stringent capital requirement, the nation’s five or six largest banks would likely have to downsize if it took effect.
The proposal, known as the Minneapolis Plan, has gained little traction in Congress or with Fed policymakers. In part, that’s because it imposes a trade-off. Banks that hold more capital cannot lend as much, which would create a drag on economic growth.
Kashkari also referred to the plan in response to another questioner on Twitter who asked for his thoughts about proposals made earlier this week by the central bank’s Board of Governors to loosen some post-2008 regulations that the banking industry viewed as too restrictive.
“I believe the biggest banks are still too big to fail. See @MinneapolisFed plan to End TBTF,” Kashkari wrote, using the acronym for too big to fail. “Fed liquidity rules forcing banks to have ample short-term liquidity makes banks safer — but not safe enough. They need a lot more capital.”
He did not directly reply about whether he sided with the one Fed board member, Lael Brainard, who opposed the changes. Brainard said the proposals would increase risks for the financial system and were not needed.
One proposal deals with liquidity, the amount of funds a bank must maintain that would be readily available in times of crisis. The other would loosen the frequency that some foreign and domestic banks would be required to submit “living wills,” documents that show how a failed bank would wind down operations.
The changes will not go into effect until after a public-comment period ends this summer and could be modified based on those comments.
During Thursday’s Q&A on Twitter, one questioner asked Kashkari whether it was the Fed’s job to curb excessive behavior in finance, such as stock buybacks, junk bonds and risk or leveraged investments. Kashkari replied, “At what cost? Should we slow the economy and keep people out of the labor market to try to clamp down on buybacks? Seems like a bad trade to me.”
Zero Hedge, a finance-focused blog, then tweeted with a sarcastic “Newsflash” moniker that Kashkari, as former investment banker and Republican official, believed that stock buybacks drive the economy.
“Newsflash,” Kashkari responded on Twitter. “@zerohedge is confused again. My comment is that if we tightened monetary policy to try to clamp down on the stock market (and buybacks) that would slow the economy.”
This report includes material from the Associated Press.