Federal Reserve Bank of Richmond President Jeffrey Lacker said plans to limit the size or change the structure of the largest financial institutions must be made with the intent of allowing them to fail without government aid.
“It makes perfect sense to constrain the scale and scope of financial firms in a way that ensures that they can be resolved in an orderly manner, without government protection for creditors,” Lacker said.
U.S. regulators and lawmakers are searching for ways to limit the risk that a large bank failure will result in another taxpayer-funded bailout. Senate Republicans and Democrats are discussing legislation that would boost capital standards, while Fed officials are discussing ways to limit the safety net and curb balance-sheet expansion at the largest banks.
While the Dodd Frank Act’s preamble says its intent is to “end ‘too-big-to-fail,’” some of the largest banks may still benefit from the perception that they would be rescued by the government, Federal Reserve Chairman Ben S. Bernanke told lawmakers in February.
“We need to be working in the direction of eliminating it entirely,” Bernanke told the House Financial Services Committee on Feb. 27.
The Dodd Frank Act required firms to write living wills, or plans that describe how they would be wound down in the event of failure. Lacker said one flaw in the law is that it has provisions for temporary government support.
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