WASHINGTON — Richmond Federal Reserve President Jeffery Lacker opened a conference Friday about how to resolve too big to fail banks by saying it was a "daunting task," but one that was necessary to ensure confidence that they won't need to government bailouts in the future.
"Ensuring that the relevant portion of the financial sector is covered by robust and credible resolution plans can seem like a daunting task," he said in the remarks prepared for delivery at the conference co-sponsored by the Federal Reserve Bank of Richmond and the Board of Governors.
Resolution planning, often called living wills, are required by the Dodd-Frank Wall Street Reform act passed in 2010 following the financial crisis. There already has been two rounds of living wills submitted to regulators, Lacker said, and a third wave is slated to submit plans at year-end.
"Clearly, the Dodd-Frank Act envisions bankruptcy without government support as the first and most preferable option in the case of a failing financial institution, and for good reason," he said.
But "substantial work remains to be done, however, and substantial issues remain to be sorted out before regulators and policymakers can convince market participants of the credibility of these plans," Lacker said.
He cautioned that "resolution planning will require a great deal of hard work ... but I see no other way to ensure that policymakers have confidence in unassisted bankruptcy and that investors are convinced that unassisted bankruptcy is the norm, both of which strike me as necessary to solving the 'too big to fail' problem."
Orderly resolutions are important to ensuring investors and the public are reassured that large institutions "will be much better aligned with our public policy goal of a financial system that effectively allocates capital and risks."
"Large financial firms will prefer to be less leveraged and less reliant on short-term funding," he said. "Institutions and markets would, accordingly, be more resilient in response to financial stress. Policymakers could then credibly commit to avoiding rescues, which would reinforce appropriate incentives."
New York Federal Reserve Bank President William Dudley and Fed Gov. Daniel Tarullo will speak on the topic later in the day.
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