Fed’s Brainard: Shrinking May Be in ‘Best Interest’ for Some Large Banks

Under the Dodd-Frank Act’s systemic risk regulatory regime, some of the largest institutions may decide it is in their best interests to shrink, Federal Reserve Governor Lael Brainard said at a Bipartisan Policy Center event today. She emphasized that such decisions are left to institutions themselves and that “some may judge that the economies of scale and scope are such that it makes sense to maintain their systemic footprint.”

Brainard noted that neither Congress nor regulators have specified caps in size for large financial firms. “The private sector may be in a better position to judge the market benefits associated with economies of scope and scale and business models associated with particular banking organizations,” she explained, adding that “the public sector is likely to be a better judge of the risks that their size, interconnectedness, and complexity pose to the financial system.”

She added that the U.S. financial system is “more resilient and dynamic” in part due to its large number of banks with different sizes and business models. “That diversity is one of the hallmarks of the U.S. system, which distinguishes it from many other advanced economies,” she said. “Accordingly, we want to make sure that our regulatory framework supports banks in the middle of the size spectrum, as well as community banks, and the customers they serve.”