The following article, originally published at 8:28 a.m. on Wednesday, Nov. 16, 2016, has been updated with comments from the banking industry.
The largest U.S. banks would have to maintain a capital reserve as high as 38% of lending assets under a plan proposed by Minneapolis Fed chief Neel Kashkari to curb the risk of government bailouts like those in 2008.
Kashkari, who oversaw a Treasury Department program designed to prevent further collapses after the bankruptcy of investment bank Lehman Brothers in 2008, said the Minneapolis plan would curb the odds of future bailouts to less than 10% over a century, compared with 84% before the crisis and 67% today. Capital reserves, buffers intended to cushion against failure, were previously increased under the Dodd-Frank finance reform law in 2010.
"It is simply impossible to make that risk zero, and safety isn't free," Kashkari said in a speech Wednesday before the Economic Club of New York. "Regulations can make the financial system safer, but they come with the cost of potentially slower economic growth. Ultimately, the public has to decide how much safety they want."
The plan, which would be implemented in phases, is the result of a year-long initiative to study the risk of so-called too-big-to-fail institutions that Kashkari announced in February, shortly after taking the helm of the Minneapolis bank. It would initially require lenders with assets of more than $250 billion to raise common equity equal to 23.5% of assets. Those that remained systemically important afterward -- in other words, still posing a risk to the economy if they failed -- would have to raise as much as 38% over time.