With economic recovery "slow" and new lending "limited" four years after the financial crisis, Federal Reserve Bank of Kansas City President and CEO Esther L. George suggested "unresolved problems" could remain.
"In addition, we must consider whether what we are doing is sustainable in the long run or whether it only increases the chance of future crises," George said in Panama City Friday, according to prepared text released by the Fed.
"We should first ask ourselves if we have corrected the misaligned incentives that were behind this crisis," she said, mention "public assistance and protection" given to banks considered too big to fail. "We cannot expect to have a sound financial system if the key players in it are not held fully responsible for the choices they make."
By protecting these institutions, "further distorts these risk-taking incentives" and pressures the supervisory framework. "Enhanced supervision and the related steps many of us are taking now are unlikely to work well as long as major institutions still have incentives to take on added risk."
Past crises have taught several lessons, she said. The first id that the fastest way to recovery "is to identify the losses in the financial system and take timely and concerted action to address them." Another lesson is supervisors need to be able to identify those institutions that can survive a crisis and which need to be privatized. "Third, moral hazard issues must be considered in the steps taken," with "the responsible parties" taking losses.
While assistance was provided to institutions during the crisis, "corrective measures" weren't tied to the assistance, she said.
