Fed`s Fisher likes Volcker rule, calls for end to big U.S. banks

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Barring banks from trading with their own money, a ban that is part of a regulatory overhaul now under debate in the U.S. Congress, will add to financial system stability, a top Federal Reserve official said on Wednesday.But effective reform must include limits on the sheer size of banks, not just on their activities, Dallas Federal Reserve President Richard Fisher said in a paper published in the latest issue of International Finance.As lawmakers race to put the finishing touches on sweeping financial reform legislation this week, Senate Democrats are expected to present on Wednesday their plans to curb banks' risky trading practices.Senator Christopher Dodd said on Tuesday that he will offer a tighter version of a White House proposal known as the "Volcker rule" that would limit proprietary trading by banks."There is much to be said for former Fed Chairman Volcker's proposals," Fisher said in the paper. "Allowing commercial banks - particularly large ones - to be exposed to risky, non-traditional trading activities poses too much risk to the stability of the core banking system and thereby to the payments system, on which the day-to-day functioning of the overall economy depends."But, Fisher said, such a trading ban does not go far enough in limiting the threats posed by large banks."A truly effective restructuring of our regulatory system must also neutralize what I view as the greatest threat to our financial system's stability, the existence of institutions that are considered too big to fail," he said.Fisher has long called for breaking up such banks, which he refers to by the acronym Too Big To Fail (TBTF), and Wednesday's paper reiterated some of those arguments."I think one of the most disagreeable but sound things we must do for our economic well-being is to shrink TBTF institutions over time into entities that can be prudently managed and regulated across borders," he wrote. "Bold action is needed - and needed now - for only a financial system free of these dangerous institutions can facilitate the economy's return to a more sound and sustainable path."(Reporting by Ann Saphir)

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