Fed's Kashkari favors higher capital requirements, smaller banks

Minneapolis Fed President Neel Kashkari speaks during an interview at Reuters in New York February 17, 2016. REUTERS/Brendan McDermid (Reuters)

(Reuters) - Minneapolis Federal Reserve Bank President Neel Kashkari on Monday doubled down on his call for reforms to the U.S. banking system, saying that failing to make changes could leave taxpayers on the hook for big bank bailouts in any future financial crisis.

"I agree that many current reform efforts are headed in the right direction, particularly those that make banks stronger with additional capital, deeper liquidity and stress testing," Kashkari said. "But I am not sure those measures go far enough."

Kashkari, who during the financial crisis ran the government's $700 billion bank bailout program, has been campaigning for solutions to the nation's "too big to fail" big bank problem since shortly after taking his post at the Fed's smallest regional bank in January.

His efforts have been applauded by some fellow policymakers, but Fed leaders in Washington and some regional Fed bank presidents have not signed on to his ideas, saying that current efforts are already getting results.

Last week, for instance, U.S. regulators rejected the wind-down plans of five of eight large U.S. banks, saying the plans need revisions or the banks will face sanctions.

But to Kashkari, more needs to be done while hardships of the financial crisis are still a recent public memory.

Earlier this month Kashkari gathered bankers, regulators and scholars for a symposium to consider a range of solutions, the first of several promised gatherings he wants to use to generate a blueprint for reform by the end of the year.

On Monday, in remarks delivered to delivered to the Minnesota Chamber of Commerce in Minneapolis, Kashkari gave an update on his findings. Among the most compelling proposals, he said, are higher capital requirements for large U.S. banks, and new rules that would incentivize large financial institutions to break themselves up into smaller firms.

"Increasing common equity to assets ... seems the simplest and potentially the most powerful in terms of safety and soundness," Kashkari said. "If all of the largest banks had enough capital that investors were confident in their strength, even during an economic shock, such concerns about shared risks could be substantially reduced."

Kashkari also said he continues to think that breaking up large banks will make the financial system safer, but suggested that the design of the breakup could be left to the banks themselves.

"I believe that given sufficient incentive, banks would be able to restructure themselves," he said.

(Reporting by Ann Saphir; Editing by Meredith Mazzilli)