Reorganize Banks That are 'Too Big to Fail,' Says Fed's Fisher

U.S. authorities should reorganize the country's largest banks to protect against the risk of institutions that are "too big to fail" and that would saddle ordinary Americans with the cost of a bailout the next time they get in trouble, a senior Federal Reserve official said on Wednesday.

The 12 "megabanks" Fisher identified together account for 69 percent of all U.S. banking assets, but represent only 0.2 percent of the country's 5,600 banks.

"The 12 institutions ... are candidates to be considered TBTF because of the threat they could pose to the financial system and the economy should one or more of them get into trouble," he said.

He did not name them all, but showed a slide displaying the names of five top U.S. banks: JPMorgan Chase, Bank of America, Goldman Sachs, Citigroup and Morgan Stanley.

Fisher said he had received support from lawmakers on both sides of the aisle for his views, which the Dallas Fed has been pressing for over a year, and had even heard from famed dealmaker Sandy Weill, who said he agreed with Fisher.

Weill, a former chairman of Citigroup, built the Travelers Group insurance company into a financial services giant in a $70 billion merger with Citicorp in 1998.

"I'm still scratching my head," about Weill's approval, Fisher said.

By contrast, the country's 5,500 community banks with assets under $10 billion and the 70-or-so larger regional banks, with assets of $10 billion to $250 billion, pose no such threat, Fisher said, and had been shut by regulators in the past when in trouble.

Arguing that firms deemed too big to fail enjoy a "perverse" subsidy because creditors were prepared to lend them money at a lower rate than smaller, better-regulated and less risky firms, Fisher said the situation had worsened since the crisis.

He acknowledged that big banks - which give generously to U.S. lawmakers of both parties and have well-funded lobby machines in Washington - would likely not reorganize themselves voluntarily, and he envisaged federal action.

"A subsidy once given is nearly impossible to take away," Fisher said. "Thus, it appears we may need a push, using as little government intervention as possible to realign incentives, re-establish a competitive landscape and level the playing field."