Washington needs a more consistent way to bail out distressed financial institutions in order to repeat creating the rise of too-big-to-fail banks, says Federal Reserve Bank of Philadelphia President Charles Plosser.
“No firm ought to be too big to fail,” says Plosser, according to Bloomberg.
“Not only does the too-big-to-fail badge generate moral hazard at these institutions, it also creates powerful incentives for other institutions to become large and complex and take risks at taxpayers’ expense.”
Congress is currently examining the Federal Reserve's role in how it regulates the banking sector, especially now that taxpayer money helped create even larger financial institutions often dubbed too-big-to-fail that also paid large bonuses to their employees.
“The financial crisis has certainly underscored the need to reconsider our financial regulatory structure,” says Plosser.
“A major lesson of the recent crisis is that our regulations did too little to promote market discipline.”
Federal Reserve Chairman Ben Bernanke has admitted that the nation's monetary authority should have done more to protect consumers from high-risk mortgages during the housing crisis and pressured banks to hold more capital.
“I did not anticipate a crisis of this magnitude,” Bernanke told Congress recently, according to the New York Times.
“In the area where we had responsibility, the bank holding companies, we should have done more,” Bernanke adds.
“That is a mistake we won’t make again.”
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