Last year, Neel Kashkari said goodbye to sunny California and moved himself and his two enormous dogs to the woods of Minnesota. There, as Minneapolis Fed President, he embarked on a quest to break up the nation’s biggest banks, as soon as he was done chopping up the rest of the northern firs out back.
On Wednesday Kashkari made good on his promise to take Wall Street to the woodshed, releasing a plan that would drastically hike the amount of common equity capital large banks need to hold to cushion them against failure – from a current minimum of 4.5 percent to a new benchmark of 23.5 percent.
“We will have fewer mega banks, and there will be far less concentration in the banking system,” Kashkari said. “If there are any [too big to fail] banks left, they will be so well-capitalized that their risk of failure will truly have been minimized.”
Evidently the backwoods hollow Kashkari lived in while devising the guidelines was totally insulated from any form of communication that might relay important news – like, say, that of the recent Republican sweep of Congress and the White House, and the president-elect’s subsequent promise to “dismantle” existing Dodd-Frank regulations.
Of course, nothing is certain in the age of Trump. It remains to be seen whether his administration will move toward Rep. Jeb Hensarling’s CHOICE Act – which provides regulatory relief for banks that boost leverage ratios – or take a more controlled-demolition approach.
Either way, Kashkari is seeking more, not less, regulation. Under his proposal, banks would also have to seek certification from the Treasury Department that they are no longer systemically important or else face a slow ratcheting-up of common equity to a maximum of 38 percent. It’s hard to imagine a Treasury Secretary Mnuchin going along with this. But again, who knows.
There may be some glimmers of hope for Kashkari, however. Reinstating Glass-Steagall was a Trump campaign talking point and, bizarrely, a GOP platform item, though there hasn’t been peep from the incoming administration on that front. It also appears that Trump’s allegedly white-nationalist top advisor Steve Bannon has no love for the big banks, unless they find a way to be more “Judeo-Christian” in their pursuit of profit.
But the odds are against the plan. It’s truly unfortunate timing for Kashkari, who seems to believe quite genuinely in the importance of making sure our financial system doesn’t melt down every few generations. In a press event Kashkari noted that the polarized political climate of today – which, through Trump, has helped to smother his plan in the cradle – was exacerbated by the global financial crisis.
Yet maybe Kashkari will get a better reception the next time one of those rolls around. Which could well be sooner rather than later.