Current attempts to solve the too big to fail problem "may not be sufficient," according to Federal Reserve Bank of Philadelphia President and Chief Executive Officer Charles I. Plosser, who suggests "a simpler approach to capital requirements and a more rule-like resolution process."
"We should seek to increase capital buffers for financial institutions and to simplify capital regulation by reducing or eliminating the ever-increasing complexity of risk-weighted capital calculations," Plosser told an audience at Boston College Thursday, according to prepared text released by the Fed. "Furthermore, if we are to end discretionary bailouts and the associated moral hazard problems that they create, we should seek more rule-like methods to resolve failing firms, such as a new Chapter 14 bankruptcy mechanism."
Stating that he's "long advocated simple, robust rules and transparent communications" for monetary policy, Plosser said "a simpler approach to capital requirements and a more rule-like resolution process can offer more effective and less complex solutions to ending too big to fail and thus reduce financial fragility."
Also, Plosser suggested, designing "regulations that encourage rather than discourage markets to monitor risk-taking and reduce our reliance on regulators' discretion and judgment. Rules and regulations are inevitably backward-looking, while markets are forward-looking and a better judge of the financial fragility of an institution in real time. These mechanisms will change the incentives of firms, market participants, and regulators in ways that provide us with a better chance of ending too big to fail and promote a more stable financial system."
