Kansas City Fed President Takes on Too Big To Fail Banks

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The President of the Kansas City Federal Reserve Bank gave a speech (via Mark Thoma) in which he criticized the banking reforms in the wake of the financial crisis. It appears that the primary purpose of banking reform was to preserve a system in which some banks are too big to fail. The banking system has become less competitive and even more concentrated. He views the current structure as a risk to capitalism itself. He recommends that Glass-Steagall, which separated retail banks from many activities engaged in by investment banks, be restored. He also counters the arguments that US banking would be less internationally competitive under Glass-Steagall.

He recognizes that the shadow banking system, which contributed heavily to the financial crisis also needs to be regulated. The major problem was that the shadow banks borrowed heavily short term from wholesale bankers such as money market funds, using risk long term assets as collateral. When the risk of those assets was exposed, there was a run on the shadow banks and they lost their source of liquidity. He proposes some changes to the shadow banking system that would reduce the risk of bank runs.