Dallas Fed cap shrinking US banking units by half

A proposal by the Federal Reserve Bank of Dallas to limit government support for banks could force JPMorgan Chase & Co and Bank of America Corp to shrink their US consumer and commercial- lending units by more than half.

Richard Fisher, president and chief executive officer of the Federal Reserve Bank of Dallas. The proposal put forward by Fisher and Executive Vice President Harvey Rosenblum would require separate capitalization and funding for investment- banking and trading units without forcing firms to break up.

The plan would cap assets at deposit-insured divisions of the largest U.S. financial firms at about $250 billion and wall off investment banking from traditional lending, Dallas Fed Executive Vice President Harvey Rosenblum said in an interview. The limit is needed to allow the Federal Deposit Insurance Corp. to shut a failed bank without using taxpayer funds, he said.

Rosenblum and his boss, Dallas Fed President Richard Fisher, join a chorus of Democratic and Republican policy makers in expressing dissatisfaction with efforts to assure that banks are no longer too big to fail. FDIC Vice Chairman Thomas Hoenig has called for breaking up the largest lenders and Senator Sherrod Brown, an Ohio Democrat, for limiting their size.

“While we enact high and deep Chinese walls between commercial banking and the rest of the megabanks’ operations, we also need to make sure the deposit-insured units are of a size that they can be closed and resolved quickly,” Rosenblum said. “Commercial banking is risky enough on its own.” Fisher revealed the outlines of the proposal in a Jan. 16 Washington speech. He didn’t specify what the cap would be at the time. The two wrote an op-ed piece for the Wall Street Journal this week defending their plan to make traditionalbanking units “too small to save” without putting a dollar amount on the limit.

While Congress probably won’t enact new banking legislation so soon after the 2010 Dodd-Frank Act, Fisher and others can pressure regulators to be tougher, according to Brian Gardner, a Washington policy analyst at Keefe, Bruyette & Woods. The law has given the Fed and the FDIC authority to break up firms they deem threatening to the financial system, he said.

“We’re not going to have an AT&T moment,” said Gardner, referring to the 1984 breakup of the phone company. “But the regulators are going to use their powers and new tools to make life so tough for the big banks that they’ll end up shedding assets, businesses and breaking up de facto on their own.”

JPMorgan’s U. S. consumer and commercial-lending units had assets of $646 billion at the end of December, according to a regulatory filing by the New York- based bank. Similar divisions at Charlotte, North Carolina- based Bank of America had $686 billion of assets. That means each would have to shrink by about 60 percent to drop below the Dallas Fed’s proposed cap. JPMorgan is the largest U.S. bank by assets, and Bank of America is No. 2, when all their businesses are included.

Citigroup Inc, the thirdbiggest lender, would need to reduce its US consumer unit by about 30 percent. Traditional banking in the U.S. makes up a smaller portion of the New York- based firm’s total assets than at peers. San Franciscobased Wells Fargo & Co. (WFC), the fourth-largest U.S. bank, might have to shrink about 70 percent. Estimates of how much lenders would need to trim to comply with limits proposed by Fisher and Rosenblum aren’t exact because firms don’t break out data the same way and sometimes count asset- management or investment-banking assets in their consumer units. Rosenblum said the cap hadn’t been set firmly yet because further study is required.