Former FDIC Chief: Several Banks ‘Too Big to Fail’

Oliver Quillia for cnbc.com

Following news this week that JPMorgan Chaselost $2 billion on a bad hedging strategy, former FDIC Chairman Bill Isaac on Friday urged U.S policies to prevent banks that are “too big to fail.”

“I would agree that we have a number of banks in the country that are just too big to fail, as they generally don’t get in trouble alone; they get in trouble at the same time,” he said on CNBC’s “The Kudlow Report.”

Isaac, who previously led the Federal Deposit Insurance Corporation and now chairs Fifth Third Bancorp, described the banking industry’s delicate balance.

“They comprise about half the economy, about half the financial system, so we really can’t let these banks fail right now,” he said. “What we do about it is a very different issue. I frankly think that if we had the right regulatory policies in place, these banks wouldn’t dominate the way they do now.”

Isaac said there were things regulators could do to make the market “impose more discipline.”

An op-ed Isaac co-authored with retired Wells Fargo Chairman Richard Kovacevich in the Financial Times called for increased market discipline.

“A more effective form of market discipline would be to require large financial institutions to issue, at least annually, both long-term senior and subordinated debt,” they wrote. “The total long-term debt should be more than enough, when coupled with a bank’s equity and reserves, to cover any reasonably conceivable losses the institution might incur.”

Such a move, he told host Larry Kudlow, would be to engage the market.

“This will impose some market discipline on these banks. They won’t be able to raise that debt, or the price will be too high if they’re taking big risk because we won’t bail out these long-term creditors,” Isaac said.

Rep. David Schweikert, R-Ariz., a member of the House Financial Services Committee, proposed strengthening regulations that create “a fairly dynamic environment.”

“The key to being successful in the financial world is having a low cost of capital, being able to take significant upside risks but still have a low cost of capital,” said Rep. Brad Sherman, D-Calif., who criticized large banks that can take outsized risk “because you’re able to turn to your investors and say: If we go under, we’ve got the Treasury Department on speed-dial.”

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