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Fed's Kashkari says pandemic aid was also 'banking bailout'

FILE PHOTO: Minneapolis Federal Reserve Bank President Neel Kashkari poses during an interview with Reuters in his office at the bank's headquarters in Minneapolis, Minnesota, U.S., January 10, 2020. REUTERS/ Ann Saphir

(Reuters) - U.S. banks got their second bailout in little more than a decade when Congress cut checks to millions of Americans to help them through the coronavirus crisis, Minneapolis Federal Reserve President Neel Kashkari said on Friday, calling for a new round of reforms to prevent it from happening again.

“I applaud Congress’ bold actions to support people affected by the COVID-19 crisis, but we need to be clear that families weren’t the only beneficiaries,” Kashkari said in remarks prepared for delivery to a Council of Institutional Investors conference. But banking losses, he said, would have been much larger had Americans not had that extra cash to spend.

“This was also a banking bailout,” he told the group.

Most Fed officials including Fed Chair Jerome Powell say the current recession is very different from the last one, which was caused by excess risk-taking by banks and other financial institutions.

Banks, Powell and others have said, have softened the blow of the pandemic by drawing on capital buffers built up since the last crisis to support households and businesses in this one.

Kashkari’s take is different. Why, he asked, should banks be allowed to rely on overnight funding markets? Those have proven fragile, he said.

“The primary value I see is that it allows firms to eke out a few extra basis points of earnings in good times and then requires the central bank to backstop it when risks emerge,” he said. “With smart, aggressive regulation, the American economy could thrive on an efficient, competitive, and innovative financial system that was more resilient against shocks—one that required taxpayers to step in far less often and at lower cost.”

Laws and rules passed since the 2007-2009 crisis have forced banks to increase the capital they have on hand against losses, but Kashkari has urged even higher requirements.

Kashkari’s views often differ from his colleagues, including this week when he dissented on a rate-setting decision.

Reporting by Ann Saphir; Editing by Paul Simao and Chizu Nomiyama

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