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January 10, 2018

The Federal Reserve Bank of Minneapolis (Minneapolis Fed) released the final Minneapolis Plan to end too-big-to-fail (TBTF). This plan makes a stronger case than the draft plan, for raising capital requirements for the largest banks while drastically reducing burden on the smallest banks. Enacting the Minneapolis Plan would reduce the 100-year chance of a crisis—from the current risk of 67% to only 9%—while generating substantial benefits relative to costs.

The Minneapolis Fed had released a draft plan in late 2016 and invited public and expert review and feedback. The comments confirm that the fundamental analysis and recommendations were correct. New analyses by experts (who are unrelated to the Minneapolis Plan effort) during the review period also support and call for capital requirements similar to those recommended in the Minneapolis Plan. The final plan provides significantly more detail on the recommendation to right-size the supervision and regulation of community banks. The plan would fundamentally change the nature of community bank supervision, effectively limiting supervision to the aspects of community banking that pose real risk. The plan brings that same approach to bank regulation, changing community bank rules on capital requirements, appraisals, data collection, some Dodd-Frank requirements, and other areas. The Minneapolis Plan includes four steps to strengthen the financial system:

  • Dramatically increase common equity capital for banks with assets exceeding USD 250 billion.
  • Call on the U.S. Treasury Secretary to certify that individual large banks are no longer systemically important or else subject those banks to extraordinary increases in capital requirements—up to 38% over time.
  • Prevent future TBTF problems in the shadow financial sector by imposing a tax on the borrowings of shadow banks with assets over USD 50 billion.
  • Reduce unnecessary regulatory burden on community banks.

 

Related Link: Press Release

Keywords: Americas, US, Banking, TBTF, Minneapolis Plan, Proportionality, Minneapolis Fed

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