Federal Reserve Bank of Dallas President Richard Fisher said an implicit government guarantee for the biggest U.S. banks is an “injustice” that prompts them to take excessive risks and that they should be allowed to fail.

The largest financial firms should be restructured so each of their units “is subject to a speedy bankruptcy process,” and creditors should be notified their investments won’t be guaranteed by the government, Fisher said in testimony prepared for a House Financial Services Committee hearing Wednesday in Washington on the risk of taxpayer-funded bailouts for banks.

Fisher reiterated his view that the government should break up the biggest institutions to safeguard the financial system. He is one of the central bank’s most vocal critics of the “too-big-to-fail” advantage he says large firms have over smaller rivals.

The 2010 Dodd-Frank Act hasn’t fixed a system in which the biggest banks are “seen as critical to the proper functioning of our economy” and deserve rescues, he said.

“Less than a dozen of the largest and most complex banks are each capable, through a series of missteps by their management, of seriously damaging the vitality, resilience and prosperity that has personified the U.S. economy,” Fisher said.

“Any of these megabanks, given their systemic footprint and interconnectedness with other large financial institutions, could threaten to bring down the economy, again.”

Lawmakers should level the playing field with “reduced regulatory costs for all competitors, encourage greater innovation by all members of the banking industry and minimize the downside consequences to the economy of megabank failures,” Fisher said in the testimony.

Split Up

Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., also scheduled to testify, repeated his call for splitting up investment and commercial banking.

“There remain systemically important financial firms that are of a size and complexity that would expose the broader economy to overwhelming consequences should they encounter problems,” he said in testimony prepared for the hearing.

Hoenig said banks’ investment activities shouldn’t benefit from a government safety net.

“The public should not accept the premise that it must subsidize highly risky financial activities in order to compete for international dominance,” Hoenig said.