Lacker calls for new laws to end too-big-to-fail threat
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[February 12, 2014]
PALO ALTO, California (Reuters) — Calling too-big-to-fail banks "the most critical issue facing our
financial system," a top Federal Reserve official on Tuesday urged
new laws to address the problem, including ending Fed emergency
"During the crisis, and still today, many people view
government-provided backstops to large financial firms as a
necessity to prevent financial system malfunctions," Richmond
Federal Reserve President Jeffrey Lacker said in remarks prepared
for delivery to the Stanford Institute for Economic Policy Research.
But so long as those backstops are seen as available, he argued,
investors will continue to take risks they would not otherwise take,
making the financial system less, not more, stable.
Although Wall Street reform legislation went some way toward
preventing new bailouts, Lacker said, more legislation would be
"useful," including revamping the bankruptcy code to limit
exemptions and rewriting rules that now prevent money market funds
from suspending redemptions under stressed conditions.
"Credible commitment to orderly unassisted resolutions thus may
require eliminating the government's ability to provide ad hoc
rescues," Lacker argued. "This would mean repealing the Federal
Reserve's remaining emergency lending powers."
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The Fed's role as "lender of last resort" should not extend to
bailing out insolvent, large institutions whose failure is seen as a
threat to broader financial stability, he said. And during the
crisis, he argued, the Fed ended up acting as a backstop to private
entities that otherwise could not have gotten the financing they
(Reporting by Ann Saphir; editing by
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