Federal Reserve Bank of Richmond President Jeffrey Lacker said Friday financial firms’ so-called “living wills” should do a lot to strengthen the financial system, if banks and regulators respect these plans.
The living wills in question are plans by financial companies detailing how they expect to be wound down in the event of running into trouble. Mr. Lacker, speaking in Chicago, said these plans are vital to ending the perception that many firms are considered to be too-big-to-fail and will be bailed out by the government in the event of trouble.
“Living wills offer us the only realistic path” to ending the ongoing belief that very large firms will get government bailouts, Mr. Lacker said in the text of his speech. While living wills “have not received as much attention as other regulatory and legislative responses to the crisis, they may be the most critical, and I applaud the hard work that is being done to make them credible.”
Mr. Lacker long has argued that the too-big-to-fail problem that played such a large role in the financial crisis was in part the fault of regulators and political authorities who couldn’t resist saving failing financial firms. He has pressed for strengthening the mechanisms available to help wind down a failing firm, and he believes that reducing the prospects of a government bailout reduces the odds a firm will make overly risky decisions that can result in failure.
Mr. Lacker also said in his speech the existing bankruptcy law could be effective in dealing with a failed financial firm.
“Bankruptcy would seem to be especially advantageous for financial firms, ” he said. “Yet regulators have repeatedly chosen to handle distressed firms outside the bankruptcy process, which has led to a buildup of expectations of government support when large financial firms become troubled,” Mr. Lacker said.
Speaking to reporters after his speech, Mr. Lacker briefly touched on the outlook for monetary policy, saying “it’s too soon to know for sure” when the Fed will raise short-term interest rates off of near-zero levels. He said what happens with rates is “very contingent on how data come in.”
–Jacqueline Palank contributed to this article.
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