It’s pre­ma­ture to bust up too big banks: Fed of­fi­cial

The Pak Banker - - Front Page -


Fed­eral Re­serve Bank of New York Pres­i­dent Wil­liam C. Dud­ley said reg­u­la­tors should press on with cur­rent ef­forts to curb the risk from too-big-to-fail fi­nan­cial in­sti­tu­tions rather than try to im­me­di­ately dis­man­tle them.

“Crit­ics of our ap­proach be­lieve it would be bet­ter to just break up firms deemed TBTF now,” Dud­ley said to­day in a speech in New York. “My own view is that while this could yet prove nec­es­sary, it is pre­ma­ture to give up on the cur­rent ap­proach: chang­ing the in­cen­tives fac­ing large and com­plex firms, forc­ing them to be­come more re­silient and mak­ing the fi­nan­cial sys­tem more ro­bust to their fail­ure.”

More than four years af­ter the col­lapse of Lehman Broth­ers Hold­ings Inc., U.S. reg­u­la­tors are still grap­pling with how to re­duce the risk tax­pay­ers will need to bail out too-big-to-fail fi­nan­cial firms in a cri­sis. Dud­ley said reg­u­la­tors must lower the like­li­hood that such in­sti­tu­tions fail and the “cost to so­ci­ety” in the event they do.

Dud­ley, who didn’t com­ment on the out­look for the econ­omy or mone­tary pol­icy, said that while “ad­vo­cacy for the break- up path has been strong,” it has so far lacked “the de­tail to as­sess whether this is in­deed su­pe­rior to the course we are cur­rently fol­low­ing.”

“It would be help­ful in this re­gard if ad­vo­cates of break-up so­lu­tions would put a bit more flesh on the bones and de­velop de­tailed pro­pos­als that ad­dress es­sen­tial ques­tions of how such down­siz­ing or func­tional sep­a­ra­tion would be ac­com­plished, and what ben­e­fits and costs could be expected,” Dud­ley said.

Reg­u­la­tors have bol­stered cap­i­tal and liq­uid­ity buf­fers at fi­nan­cial firms and forced them to draw up so-called “liv­ing wills” for their un­wind­ing, Dud­ley said.

The Fed to­day told the 30 largest banks to test whether they could with­stand a se­vere re­ces­sion in the U.S. and other ma­jor economies with weak­en­ing hous­ing mar­kets. The Fed drew up a stress test in 2009 to re­store con­fi­dence in the fi­nan­cial sys­tem af­ter the worst fi­nan­cial tur­moil since the Great De­pres­sion brought down Bear Stearns Cos. and Lehman.

Reg­u­la­tors have also been work­ing to make the fi­nan­cial sys­tem “more ro­bust,” such as through the whole­sale fund­ing mar­kets, he said.

“We have a con­sid­er­able ways to go to fin­ish the job and re­duce to tol­er­a­ble lev­els the so­cial costs as­so­ci­ated with such fail­ures,” Dud­ley said. “We should continue to press for­ward on the first path” of min­i­miz­ing the costs from the col­lapse of a too-big-to-fail firm, he said. “But, if we fail to reach our des­ti­na­tion by this route, then a blunter ap­proach may yet prove nec­es­sary.”

Dud­ley said in re­sponse to an au­di­ence ques­tion that reg­u­la­tors “have a lot to do” in writ­ing the rules re­quired by the Dodd- Frank fi­nan­cial over­haul leg­is­la­tion, and that it may take a while for them to com­plete their task.

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