U.S. regulators need to complete a comprehensive bankruptcy program implementation to allow large financial institutions to unwind in the event they fail, rather than depend on government interventions, a top Fed official said on Friday.
Richmond Federal Reserve Bank President Jeffrey Lacker said that policy-makers continue to feel compelled to handle large bank failures outside of bankruptcy, a belief with which Lacker strongly disagrees.
Lacker, in prepared remarks for an event in Chicago, did not discuss monetary policy in his speech. Afterwards, he told reporters that it is too soon to say when the Fed will raise interest rates.
Lacker, who is a voting member on the Fed's policy setting committee next year, said in his speech that even though the Fed is making progress with its efforts to get large banks to complete resolution plans, or so-called living wills, a lot more work needs to be done.
"As long as regulators retain discretion to intervene with government funding, the credibility of resolution plans will be at risk," Lacker said in prepared remarks for a speech in Chicago on Friday.
Dodd-Frank financial market reforms, in an effort to prevent a repeat of the chaos that followed investment bank Lehman Brothers' failure in September 2008, demands that big banks draft a plan for their own orderly resolution, dubbed a 'living will'.
The plans are meant to allow a bank to be dismantled under the bankruptcy code withoug government support, though Lacker noted that the process still has a long way to go.
In August, the Federal Reserve and the Federal Deposit Insurance Corp. told 11 of the largest banks to address significant shortcomings in the living wills that they submitted.
Lacker said in his remarks that the government still has emergency lending powers and, under Title II of Dodd-Frank, the ability to take a failing bank into receivership, while tapping a U.S. Treasury line to assist creditors.
The Richmond Fed president said Chapter 11 bankrutpcy was a better way to resolve a failing bank.
"Broad protection for so many subsidiary creditors (under Title II) seems likely to weaken market discipline and exacerbate the too-big-to-fail dynamic that led to the crisis," Lacker said.
Credible, unassisted resolutions may require "eliminating the power of governmental entities to provide ad hoc rescues," he said.
(Reporting by Michael Flaherty and Tom Polansek in Chicago; Editing by Chizu Nomiyama)