Neel Kashkari On “Too Big to Fail”

Previously, JPMorgan Chase CEO Jamie Dimon stated in his annual letter to shareholders that the issue of “Too Big to Fail” is solved.

“Essentially, Too Big to Fail has been solved—taxpayers will not pay if a bank fails,” said Dimon in his shareholder letter. “The American public has the right to demand that if a major bank fails, they, as taxpayers, would not have to pay for it, and the failure wouldn’t unduly harm the U.S. economy. In my view, these demands have now both been met.”

Despite the sunny outlook from Dimon, Minneapolis Federal Reserve President Neel Kashkari stated in an interview with Adam Shapiro on Fox Business that Too Big to Fail has not been solved, and is in fact worse. In addition, Neel Kashkari took issue with Dimon’s statement in his letter that banks are excessively capitalized, and that the capital standards should be lowered.

“Unfortunately, both of those statements are wrong,” Kaskari said of the statements in Dimon’s letter. “The biggest banks are bigger than they were before the crisis, they’re absolutely sill too big to fail. It’s important that the American people know it.”

Shapiro brought up the issue of bondholders expecting tax payers to bail them out. According to Kashkari, the issue is that if bondholders of one bank see losses being imposed on one bank, it could set off a “domino effect” of bondholders pulling their funds from the bank.

“The only way to stop these dominoes from falling is equity, common stock” said Kashkari. “Equity holders are supposed to take losses, they have no ability to take pull their money out of a bank, unlike a bond. That fundamental difference is what makes equity so powerful in stabilizing the bank, and preventing those dominoes from falling.”

Kashkari stated that instead of lowering the capital standards, capital standards should be raised. According to Kashkari, the banks are 70 percent likely to require a bailout again within the next century, and a raised capital standard would help the Fed to relax standards to help small banks.

“[Capital standards] need to be roughly doubled from where they are today,” said Kashkari. “If we make the biggest banks put down about 20 percent on their investments, that buffer will be there to protect you and me, to protect the taxpayers.”