If the Fed Knows Banks Are Too Big, Why Doesn't It Make Them Smaller? The Baseline Scenario By James Kwak The Federal Reserve is serious—about something. On May 2, The Wall Street Journal reported that regulators were pushing to require "very large banks to hold higher levels of capital," including minimum levels of unsecured long-term debt, as part of an effort "to force banks to shrink voluntarily by making it expensive and onerous to be big and complex." The article quoted Fed Governor Jeremy Stein, who said, "If after some time it has not delivered much of a change in the size and complexity of the largest of banks , one might conclude that the implicit tax was too small, and should be ratcheted up" (emphasis added). A few days later, Fed Governor Daniel Tarullo said roughly the same thing (emphasis added): "'The important question is not whether capital requirements for large banking firms need to be ...
