PIMCO: Breaking Up Major U.S. Banks 'A Bad Idea'

Feb 24 2016 | 10:31pm ET

By Jennifer Ablan (Reuters) - Bond fund manager PIMCO criticized a proposal to break up the big U.S banks that was put forth by its former managing director Neel Kashkari, the new president of the Minneapolis Federal Reserve Bank.
"Breaking up the big banks is a theme we hear increasingly from the presidential candidates, and Neel's speech adds to this movement," Christian Stracke, managing director and global head of the credit research group at PIMCO, told Reuters in a telephone interview on Wednesday.
Stracke wrote in a report late Tuesday that breaking up the big American banks is "a bad idea."
"We wanted to explain how complicated and potentially risky this could be. A rushed and poorly planned move to break up the banks under a new administration next year could be very destabilizing for the economy," Stracke said by telephone.
Kashkari caused a stir week ago when he said the Federal Reserve Bank of Minneapolis would launch a year-long research effort to come up with "bold, transformational" fixes for a financial system that he believes still poses grave risks to the global economy. He floated ideas like breaking up the big banks, treating them like utilities or taxing their leverage, the amount of debt they hold relative to capital.
Kashkari, a former banker and Treasury official, oversaw the 2008 government bailout of the financial sector called TARP, which became a political punching bag even though many also credited it with preventing a deeper recession.
That experience, along with the track record of Minneapolis Fed researchers on whether banks should be "too big to fail," created an opportunity for the bank to raise the issue at a time when there is no crisis.
Stracke's report said tighter regulations are already helping the banking sector and warned that a breakup could prompt another credit crunch. Among other things, it said smaller banks are not necessarily less risky and bondholders would be wary of new entities.
"Since the crisis in 2008–2009, we have seen a wave of improvements in bank regulation and supervision, from the application of Basel III enhanced capital and liquidity requirements to much of the Dodd-Frank Act, robust stress testing and the move to greater transparency in bank risk disclosures," Stracke said in the report.
PIMCO, a unit of Allianz SE, oversaw $1.43 trillion in assets under management, as of December 31, 2015.

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