Financial Regulatory Forum

Richmond Fed chief Lacker proposes banning U.S. Fed loans to non-banks

By Reuters Staff
March 1, 2010

By Pedro Nicolaci da Costa

WASHINGTON, March 1 (Reuters) – Richmond Federal Reserve Bank President Jeffrey Lacker on Monday proposed abolishing the authority of the U.S. central bank to lend to non-bank firms, which he said would help re-establish market discipline.

“I and several others have suggested limiting the Fed’s ability to engage in extraordinary credit measures,” Lacker said in prepared remarks at a breakfast sponsored by the Institute for International Bankers.

“Such limits might include abolishing the so-called 13(3) provisions that allow the Fed to lend to entities outside of banking institutions with regular access to the discount window,” he said.

His comments come as Congress discusses ways to reform financial regulation following the most severe financial crisis in generations. Bailouts of large investment conglomerates like Bear Stearns and AIG have been particularly unpopular, sparking calls for a new regulatory authority to wind down large financial institutions in an orderly fashion.

Lacker argued such intervention has strengthened investor perceptions that big firms will never be allowed to go under. He said changing this view was much more important than determining which particular regulator has authority over what sliver of the financial system.

“Compared to the real reform of clarifying the scope of the financial safety net, optimizing the number or organization of regulators strikes me as a second- or third-order problem at best,” Lacker said. “And proposals to materially alter the Federal Reserve’s supervisory responsibilities strike me as misguided.”

Certain proposals in the Senate have envisioned stripping the Fed of its regulatory role following what many saw as critical failures of supervision leading up to the crisis. Such an outcome appeared increasingly less likely, however.

Chrisopther Dodd, the U.S. Senate’s chief architect of financial regulation reform, said on Friday the Federal Reserve may “not necessarily” lose its authority to supervise banks, signaling a potential shift in his thinking.

(Reporting by Pedro Nicolaci da Costa, Editing by Chizu Nomiyama)

((pedro.dacosta@thomsonreuters.com; +1 202 898-8300; Reuters Messaging: pedro.dacosta.reuters.com@reuters.net))

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