Bernanke tells Warren 'too big to fail' banks 'will voluntarily reduce their size'

The Chairman of the Federal Reserve looked mighty uncomfortable Tuesday being grilled by Sen. Elizabeth Warren (D-MA), a former Harvard professor and economics expert who posed one very blunt question to him that many Americans have been asking for years: "When are we going to get rid of too big to fail?"

His response: "Banks will voluntarily reduce their size" over an undetermined amount of time.

At the Senate banking committee hearing on monetary policy, Warren stressed that small banks are being crushed by interest rates while big banks have made billions from secret, low-interest Federal Reserve loans since the crash of 2008.

"So I understand that we're all trying to get to the end of too big to fail, but my question, Mr. chairman, is until we do, should those biggest financial institutions be repaying the American taxpayer that $83 billion [yearly] subsidy they're getting?" she asked

Bernanke said the aid to big banks through cheaper loans came about because of "market expectations" in 2008 that are no longer correct. "We have an orderly liquidation authority," he said. "Even in the crisis, in the case of AIG, we wiped out the shareholders."

Warren stopped him there. "Excuse me though, Mr. chairman, you did not wipe out the shareholders of the largest financial institutions, did you? The big banks?"

"We didn't have the tools, now we could," Bernanke insisted.

Moments later, Warren doubled back again. "We've now understood this problem for five years," she said. "When are we going to get rid of too big to fail?"

"Well, as we've been discussing, some of these rules take time to develop," Bernanke said. "The orderly liquidation authority, I think we've made progress on that. We've got the living wills. I think we're moving in the right direction. Um, if additional steps are needed then Congress obviously can discuss those, but we do have a plan and I think it's moving in the right direction."

"Any idea about when we're going to arrive in the right direction?" Warren asked.

"It's, it's, it's gonna take..." Bernanke stammered. "It's not a zero-one thing, it's over time you'll see increasing, uh, increasing market expectations that these institutions can fail. I would make another prediction, and predictions is always dangerous, that the benefits of being large are gonna be sm-- are gonna decline over time, which means that banks will voluntarily reduce their size because they're not seeing the benefits they used to get."

"I read you on this," Warren said. "I read your predictions on this in your earlier testimony, but so far it looks like they're getting $83 billion for staying big."

"Well, that's one study," Bernanke said. "You don't know whether that's an accurate number."

The Dallas Federal Reserve reported last March that just five "too big to fail" banks control more than 50 percent of the banking industry's assets. The top 10 institutions controlled over $7 trillion in 2010, or roughly half the U.S. gross domestic product that year.

This video is from CSPAN 3, aired Tuesday, Feb. 26, 2013.