"The 'oversize banking' model of too-big-to-fail is more dangerous than ever," Managing Director Christine Lagarde told the Economic Club of New York ahead of the IMF's spring meeting in Washington next week.
"We must get to the root of the problem with comprehensive and clear regulation [and] more intensive and intrusive supervision," she told the club, whose membership is dedicated to promoting the study and discussion of social, economic and political questions.
Too-big-to-fail banks are considered so large and interconnected that they must be supported by the government when they face difficulty because their failure would be disastrous to the economy.
Bank of America Corp., Bank of New York Mellon Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley, State Street Corp. and Wells Fargo & Co. are the U.S. banks considered too big to fail by the Financial Stability Board, a 4-year-old international body that monitors and makes recommendations about the global financial system.
Seventeen other banks the stability board considers too big to fail are based in Europe and four are based in Asia.
Lagarde said regulators need "frameworks for orderly failure and resolution" and she called for these frameworks to cross borders and to be overseen by authorities who are truly empowered to exercise their authority.
Her comments came more than a month after U.S. Attorney General Eric Holder told the Senate Judiciary Committee the Justice Department faced difficulties bringing criminal charges against the financial giants when they're suspected of crimes because of fears the banks' interconnectedness would endanger the national or global economy.
"Some of these institutions have become too large," Holder told lawmakers March 6. "It has an inhibiting impact on our ability to bring resolutions that I think would be more appropriate."
Federal Reserve Bank of Dallas President Richard Fisher followed up March 16, telling the Conservative Political Action Conference in Washington the biggest financial institutions' assets should be limited so the banks change from too big to fail to "small enough to save."
"The American people will be grateful to whoever liberates them from a recurrence of taxpayer bailouts," Fisher told the conservative audience.
In her address Wednesday, Lagarde also criticized the U.S. government's $85 billion in cuts, known as sequestration, which she said could cut U.S. output 0.5 percent, risking "throwing away needed growth, especially at a time when too many people are still out of work."
"It is also an extremely blunt instrument, imposing deep cuts in many vital programs -- including those that help the most vulnerable -- while leaving untouched the key drivers of long-term spending," said Lagarde, a former conservative French finance minister.
She said the world was now developing a "three-speed" global economy, which she defined as "those countries that are doing well, those that are on the mend and those that still have some distance to travel."
Emerging markets are doing well, the United States is on the mend and the 17-country eurozone has some distance to travel, she said.
Each of the "speeds" needs to be careful to avoid a recurrence of the global financial crisis.
In the United States, "it is more important than ever to put in place a credible, medium-term road map to bring down the debt -- a balanced plan made up of savings in entitlement spending plus additional revenues."
Right now, she said: "Adjustment is too aggressive in the short term and too timid in the medium term. This adds to uncertainty and casts a shadow on the recovery.
"We know the future we want. We know the path to get there," Lagarde said. "The task before us now is to act, to make that future a reality, to get ahead -- and stay ahead -- of the crisis."
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