Minny Fed’s Stern Dubious About Seizing Non-Banks

Minneapolis Federal Reserve Bank president Gary Stern expressed skepticism about a centerpiece of Treasury Secretary Timothy Geithner’s financial regulatory reform proposals yesterday.

Stern, in remarks prepared for delivery at the Brookings Institution in Washington, expressed doubt that giving the federal government power to seize large, “systemically important” non-bank financial institutions would be effective.

Existing law — the Federal Deposit Insurance Corporation Improvement Act — gives the FDIC authority to act as a receiver for an insolvent bank and to set up a “bridge bank” to facilitate an orderly liquidation of the firm. The FDIC can take over and operate a large bank if it just seems to be on the verge of failure.

But there is no such resolution mechanism for other types of financial firms. And Geithner, with the support of Fed chairman Ben Bernanke, has asked that similar authority be extended to non-bank financial firms.

But Stern was dubious, without specifically mentioning the Geithner proposal.

“Just as we should not rely exclusively, or excessively, on [supervision and regulation], I do not think that imposing an FDICIA-type resolution regime on systemically important nonbank financial institutions will correct as much of the TBTF [too big to fail] problem as some observers anticipate,” he said.

— Market News International

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