Neel Kashkari picked a bad day to try to fix the financial system.
As the president of the Federal Reserve Bank of Minneapolis unveiled a plan to safeguard the biggest banks on Wednesday morning, shares in the likes of JPMorgan Chase, Bank of America and Citigroup were coming off five days of frantic gains.
Analysts, meanwhile, were still pumping out research notes, trying to guess what a Trump presidency might mean for growth and interest rates and profits. Later that day, shares in JPMorgan seemed to wobble after a couple of tweets suggested that Jamie Dimon, the chairman and chief executive, was to become Treasury secretary. (He won’t, but he’s flattered.)
That’s the state of Wall Street these days: jumpy, distracted.
But Mr Kashkari’s plan deserves a proper hearing. You could tell as much by the reaction from lobbyists for the big banks, who were hitting reporters’ inboxes with point-by-point rebuttals before Mr Kashkari had even opened his mouth.
The way Mr Kashkari sees it, various reforms since the crisis have not got near to ending the problem of “too big to fail”. His solution is simple: more equity to absorb losses. Lots more.
Under the Minneapolis Plan, as he calls it, the biggest banks would have to issue common equity equal to 23.5 per cent of their risk-weighted assets. The corresponding leverage ratio — a simpler measure of equity to total assets — would be 15 per cent.
That’s already quite an upgrade: the eight biggest US banks now have an average leverage ratio of about 6.6 per cent. But Mr Kashkari doesn’t stop there. In phase two of the plan, the Treasury Department would have to certify that the bank no longer poses a threat to the broader financial system. If the government could not do so, the minimum level of equity capital for that bank would be jacked up by 5 percentage points each year until it reached a maximum 38 per cent of RWAs.
The choice for the banks would be obvious: get a lot smaller or get used to radically lower returns on equity.
Why the extreme measures? Because other post-crisis tools are not really cutting it.
Mr Kashkari cites the new classes of long-term debt issued by the big banks, which are supposed to convert to equity if the bank really hits trouble. Did these bonds help Deutsche Bank in the autumn, for example, when reports emerged that some counterparties were reluctant to lend to it?
Not much, apparently. Investors seemed to focus instead on the end-June leverage ratio of 2.7 per cent, easily the lowest among the big global banks.
Mr Kashkari argues that the banks’ detailed plans to wind themselves up in an orderly fashion, the so-called living wills, are not much comfort either.
During a visit to the FT this week he evoked the movie Sully, which tells the true story of a pilot who flopped his plane on to the Hudson after a flock of geese blew out both engines. In a Lehman-like crisis, in the heat of the moment, is anyone really going to reach for a 10,000-page manual?
Mr Kashkari, 43, is a keen self-promoter. He has never sat in one place for long, flitting from Goldman Sachs to Treasury to Pimco to the Fed, via a failed run at the governorship of California. Some Washington lobbyists reckon he is angling for a role of his own on team Trump — perhaps the bank supervisory job occupied by Dan Tarullo.
But he appears to have allies.
Thomas Hoenig, vice-chairman of the Federal Deposit Insurance Corporation until April 2018, has frowned on the recent trend of allowing the big banks to return more capital through dividends and share buybacks.
Jeb Hensarling, too, seems a kindred spirit. The Republican chair of the House financial services committee put out a proposal in June that is not a million miles away from Mr Kashkari’s. Under his plan, banks could achieve relief from the “suffocating constraints” of the Dodd-Frank Act if they hit a leverage ratio of 10 per cent.
But meantime, Mr Kashkari is pleased to have received endorsements from the Cato Institute, a conservative think-tank, and Bernie Sanders, the liberal Senator from Vermont.
“If I’m uniting those guys,” he says, “I’m on pretty solid ground.”
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