The Minneapolis Plan to End Too Big to Fail

The Minneapolis Plan reduces the risk of financial crises and bailouts to as low as 9 percent, at only a modest economic cost relative to the typical cost of a banking crisis. We calculate that the current regulations put into place after the 2008 financial crisis reduced the 100-year chance of a bailout from 84 percent to 67 percent.
In sum, the Minneapolis Plan will (a) increase the minimum capital requirements for “covered banks” to 23.5 percent of risk weighted assets, (b) force covered banks to be no longer systemically important—as judged by the U.S. Treasury Secretary—or face a systemic risk charge (SRC), bringing their total capital up to a maximum of 38 percent over time, (c) impose a tax on the borrowings of shadow banks with assets over $50 billion of 1.2 percent for entities not considered systemically important by the Treasury Secretary and 2.2 percent for shadow banks that are systemically important, and (d) create a much simpler and less burdensome supervisory and regulatory regime for community banks. Covered banks and shadow banks will have five years after enactment of the minimum capital requirement and shadow bank tax to come into compliance. The assessment of systemic risk by the Treasury Secretary will begin at this five-year mark.

Federal Reserve Bank of Minneapolis

November 2016

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