Dallas Federal Reserve Bank president's sensible plan to chop megabanks into pieces

Fisher

Gretchen Morgenson, in today's New York Times, examines Wednesday's Washington speech in which Richard W. Fisher, the president of the Federal Reserve Bank of Dallas proposed chopping megabanks into pieces, so that no one of them could endanger the financial system.

...Mr. Fisher’s plan is more sophisticated than Glass-Steagall, in that it recognizes how complex big financial institutions have become...
     Today’s financial behemoths are in so many different businesses that a top-to-bottom restructuring is required.      Mr. Fisher argued that megabanks not only threaten taxpayers with bailouts, but that their continuing failure to lend is also thwarting the Fed’s efforts to jump-start the economy by keeping interest rates low.
     ...According to figures compiled by Mr. Fisher’s colleagues at the Dallas Fed, community banks — defined as those with no more than $10 billion in assets — hold less than one-fifth of the nation’s banking assets. Nevertheless, they hold more than half of the industry’s small-business loans.
     ...While [community banks] account for 98.6 percent of all [5600 of] banks, they hold only 12 percent of total industry assets. They are routinely allowed to fail if they get into trouble. Few of them did during the crisis.
      Contrast these figures with those of the nation’s 12 largest banks... They account for 0.2 percent of all banks but hold 69 percent of industry assets.
     ...Understanding that it will be a tough battle to break up the megabanks, Mr. Fisher suggests that in the meantime, only commercial banking operations receive protection from the federal safety net in the form of federal deposit insurance. An institution’s other activities — securities trading, insurance operations and real estate, for example — should fall outside any backstop.
     Furthermore, he recommends that these banks require customers and trading partners to sign an agreement stating that they understand the business they are conducting is not covered by any federal protection or guarantees.