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Banks Still Too Big to Fail

The newest member of the US Federal Reserve Bank, former Goldman Sachs executive Neel Kashkari, claims that the issues revealed in 2008 have still not been resolved.  According to Kashkari, measures that were taken in the immediate aftermath of the crash were necessarily conservative given the weakness of the economy.

Raising his concern that we are no more likely to see the next crisis coming, Kashkari has called for the complete break-up of the biggest US Banks:

“I believe we need to complete the important work that my colleagues are doing so that, at a minimum, we are as prepared as we can be to deal with an individual large bank failure…

“But given the enormous costs that would be associated with another financial crisis and the lack of certainty about whether these new tools would be effective in dealing with one, I believe we must seriously consider bolder, transformational options…  including the following:

“Breaking up large banks into smaller, less connected, less important entities; Turning large banks into public utilities by forcing them to hold so much capital that they virtually can’t fail (with regulation akin to that of a nuclear power plant); Taxing leverage throughout the financial system to reduce systemic risks wherever they lie.”

Kashkari’s message will have an unpleasant ring for UK Chancellor George Osborne, who has claimed that the measures put in place after the 2008 crash are sufficient, and that it is time to stop “banker bashing”.  In fact, if Kashkari is correct, then similar bold action may be needed to prevent a meltdown in the big European banks like Deutsche Bank, RBS and HSBC.

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