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The end of big banks: a reply to Neel Kashkari

Simon Johnson, professor at MIT Sloan and a former chief economist of the IMF, says that Kashkari is proposing exactly the right approach with his initiative: to hold public conferences and extensive discussions to evaluate how to end too big to fail.

Simon Johnson, MIT Sloan
Comment to the speech of Neel Kashkari
29 February 2016
Sources: Project Syndicate and Peterson Institute for International Economics

>  The end of big banks

Simon Johnson, professor at MIT Sloan, former chief economist of the IMF and senior fellow at the Peterson Institute for International Economics, comments the speech of FED of Minneapolis President Neel Kashkari at Brookings first saying that despite all financial reforms in the United States and the European Union, the financial system is remarkably similar to the one of 2006. He strongly welcomes Kashkaris’ call for a reevaluation of how much progress has been made on addressing the problem of financial institutions that are “too big to fail”.

According to Kashkari, former U.S. state secretary and vice president at Goldman Sachs, new rules and banking regulation are not sufficient for the biggest banks in the U.S. In a speech he proposes to reconstruct them and make them smaller. Johnson points out that Kashkari is proposing exactly the right approach: to hold public conferences and extensive discussions to evaluate whether large banks should be broken up, whether they (and other financial institutions) should be forced to fund themselves with more equity and less debt, or whether there should be a debt tax to discourage excessive leverage. Results shall be published by end of 2016.

See also the testimony of Simon Johnson at a U.S. Senate Committee hearing entitled:
“The role of bankruptcy reform in addressing too big to fail”

Prepared remarks submitted to the Senate Banking Committee Subcommittee on Financial Institutions and Consumer Protection hearing on 29 July 2015

According to Johnson, the largest and most complex financial firms need to become much simpler and, most likely, smaller in order for either bankruptcy to work, as required under Title I of Dodd-Frank, or for the FDIC’s single point of entry strategy to work, if Title II powers are used. If authorities are unwilling or unable to simplify and downsize too-big-too-fail banks, they should substantially increase the required amount of loss absorbing equity for those firms.