The world's biggest banks could be forced to break up if Fed's Neel Kashkari gets his way

 
Jasper Jolly
Kashkari Testifies At House Hearing On Bailout
Neel Kashkari was intimately involved in the controversial bailout of 2008 (Source: Getty)

The biggest banks in the US could be forced to break up their operations under new plans to tackle “too big to fail” banks by dramatically increasing their capital holding requirements unveiled by an influential US central bank governor.

The risks posed by systemically important “mega banks” were also compared to “terrorism” by Neel Kashkari, a member of the Federal Reserve’s rate-setting Open Market Committee and governor of the Minneapolis Fed.

So-called shadow banks – which includes investment funds and hedge funds with debt of more than $50bn (£40.2bn) – could also be taxed on their debt to ensure that systemic vulnerabilities do not move to another sector.

The “Minneapolis Plan” aims to limit the chance of controversial government bailouts of the banking sector to less than 10 per cent, down from a 67 per cent probability currently.

The plan would force banks larger than $250bn to hold 23.5 per cent of risk-weighted assets, excluding long-term – and therefore less liquid – debt which would be difficult to cash in a financial crisis.

The plan will face severe opposition from Wall Street, as any further capital requirements would weigh heavily on bank profits.

Read more: Federal Reserve holds rates ahead of US presidential election

The reaction of the incoming Donald Trump US presidential administration may start to take shape as his central economic team becomes clearer.

On the campaign trail Trump hit out at central bankers, including governor Janet Yellen, but also decried the power of Wall Street in a sharp departure from traditional Republican party platforms.

The proposals from Kashkari, a former Goldman Sachs banker as well as a NASA engineer, would deliberately increase the penalties for big banks that do not restructure their operations.

“We believe the threat of these massive increases in capital will provide strong incentives for the largest banks to restructure themselves so that they are no longer systemically important,” he said.

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