By Steven K. Beckner

NEW YORK (MNI) – Dallas Federal Reserve Bank President Richard
Fisher warned Monday evening that the Dodd-Frank financial legislation
could have the “perverse outcome” of exacerbating the “too-big-to-fail”
problem and leading to an even more severe financial crisis sometime in
the future.

Fisher, in remarks prepared for delivery to a seminar hosted by
Market News International, expressed concern that the Act and vast new
regulations stemming from it could put additional cost burdens on
smaller and regional banks, leading to further concentration in the
banking industry and encouraging the growth of even bigger financial
institutions.

He said “market discipline” must be restored to the financial
industry and government subsidization of risk taking must be ended.

Fisher, a voting member of the Fed’s policymaking Federal Open
Market Committee, did not discuss the economy or monetary policy issues
in his text.

He said that in their attempts to solve the recent crisis, “the
most imprudent of lenders and investors were protected from the
consequences of their decisions” by government authorities. “The sinners
were rescued and the virtuous penalized.”

He said that in crafting regulations in response to Dodd-Frank, “we
need to restore market discipline in banking and let the market mete out
its own brand of justice for excessive risk-taking rather than prolong
the injustice of too big to fail.”

“It is not difficult to see where this dynamic, if uncorrected,
will lead — to more pronounced financial cycles and recurring crises,”
he warned.

Fisher warned that if the goal of restoring market discipline is
not kept in mind, “our rule making not only might fail to promote the
original objectives of reform, but could actually work against them.”

“Ironically, with Dodd-Frank, such a perverse outcome is a distinct
possibility,” he added.

For instance, Fisher feared that “the potential cumulative impact
of the many regulations demanded by Dodd-Frank will be to artificially
raise the cost structure of the non-too-big-to-fail depository
institutions.”

“Imposition of the new requirements and restrictions risks creating
new economies of scale in banking generated by the costs of regulatory
compliance, many of which could be fixed costs not fully proportional to
bank size,” he warned.

“To the extent that a large scale becomes necessary to absorb the
regulatory cost associated with reform, Dodd-Frank could intensify the
tendency toward bank consolidation, resulting in a more concentrated
industry, with the largest institutions predominating even more than in
the past,” he continued. “A more consolidated industry would only
magnify the challenge of dealing with systemically important
institutions and offsetting their historically elevated too-big-to-fail
status.”

Fisher stressed that so-called “enhanced-supervision” requirements
be imposed mainly on banks with assets of $300 billion or more. If they
are not “highly graduated and imposed primarily on the very largest
banks,” he said, “it is not difficult to imagine how the costs
associated with such supervision could lead mid-tier banks that exceed
the $50 billion threshold — yet fall well short of megabank status —
to seek merger partners in order to achieve sufficient scale by which to
help cover the cost of regulation. This would compound the problem
rather than alleviate it.”

Referring to large compensation packages for CEOs of financial
firms which have made large trading profits, Fisher said he has “no
problem with risk takers” having been one himself in a previous career
as a money manager, but he said “I never was provided with capital that
was safeguarded by government guarantees.”

“There is no logic to having the public underwrite through deposit
insurance or subsidize through protective regulation the risk-taking
ventures of large financial institutions and their executives,” he went
on. “There is a substantial case to be made for separating the ‘public
utility’ — r traditional core function of banking — from the
risk-taking function.”

As things stand, he said, “prudently managed banks are being
victimized by publicly subsidized competition from less-prudent
institutions.”

** Market News International **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,M$$BR$]