American banks should ringfence their riskier investment banking operations, according to a top financial regulator who wants the US to adopt restrictions similar to those proposed last week by Britain’s Independent Commission on Banking.
Sheila Bair, chairman of the Federal Deposit Insurance Corporation, told the Financial Times: “I think [for] the very largest ones we will need to see some structural changes. I’d like to get some public comment on the idea that if you have an investment banking affiliate... that [should be] on standalone liquidity and capital.”
She warned that regulators now had the authority to demand that US banks break themselves into smaller parts— and it “could and should be used”. Citigroup , Bank of America and JPMorgan Chase , which combine retail and investment banks, could be affected.
Ms Bair is in her last few weeks as head of the powerful bank regulator and is making a final push to end the “too big to fail” syndrome by reaching international agreements on how to wind up large financial groups and by pressing for further structural reform.
On Monday the FDIC will publish a report showing how it would use new powers to wind down a company that is important for the financial system. Using Lehman Brothers as an example, the FDIC says it could have used new powers to encourage Barclays to acquire the failing US bank and to persuade UK regulators to approve the deal. The report says that, if it had had the tools for Lehman, unsecured creditors might have received $0.97 in immediate cash for every dollar lent to the bank and a “disorderly, time-consuming, and expensive process” could have been avoided.
But for the new regime to work, financial groups would need to be “resolvable” — capable of being wound down. That required upfront change, Ms Bair said, so that an investment bank could be hived off more easily from a depository bank. Like the UK’s banking commission, she believes separate liquidity and capital could provide part of the answer.
“I think certainly from a resolution perspective that would make life a lot easier and again I think help provide more stability to the institution as a whole as well as protect us as deposit insurer by having standalone support separate from the insured bank,” she said.
Simon Johnson, professor at the Massachusetts Institute of Technology and former chief economist to the International Monetary Fund, called her comments “very helpful”.
“The FDIC is in a very delicate position here because they’re charged with running the resolution authority [and] they recognize the impossibility of a real living will,” he said.
Big US institutions identified as “systemically important” will have to prepare living wills to describe how they could be broken up in the event of collapse. Mr. Johnson and Ms Bair believe some are too complicated and will need to be simplified.