Too Big To Fail' Needs Market Solution:Former Fed President Poole
By Romy Varghese, Of DOW JONES NEWSWIRES
PHILADELPHIA -(Dow Jones)- There should be a market mechanism, not dependence
on regulators, to address the problem of banks being "too big to fail," said
William Poole, former president of the Federal Reserve Bank of St. Louis and
senior fellow at the Cato Institute.
Speaking Thursday at a conference organized by the Global Interdependence
Center and Drexel University's LeBow College of Business, Poole said there must
be creditors - not just stock holders - that are at some risk of loss.
"We need to require all the banks to have a substantial block of subordinated
debt in their capital structure," he said.
They should be long-term notes based on a certain percentage of the bank's
liabilities. If a bank can't refinance a 10-year subordinated note in the
market, for instance, then it has to shrink, he said.
Another mechanism would be to remove incentives, such as changing the tax
treatment of interest to reduce the benefits of increased leverage, he said.
Even if regulators recognize problems, they may not be able to fix them
because of political pressures, he said.
"Far-sighted bankers ought to want to have a mechanism that is market based,"
Poole said.
Poole's comments come as economists and officials have recently criticized the
concept of protecting large financial institutions from failure.
Poole also called the current situation "an affront to the market and an
affront to the economy" as large banks supported by the government are at an
advantage compared to small banks not receiving such aid.
In addition, officials haven't said what the financial system would look like
after the crisis and ensuing government intervention, besides some "truly empty
comments" on regulation, said Poole.
The Federal Reserve is underestimating political risks as it has "compromised
its political independence", he added. He said it's "inevitable" that the Fed
will see market losses on its asset purchasing programs because of interest rate
risks. "Members of Congress are knowingly irresponsible...because it plays well
on Main Street."
Poole was the president of the Federal Reserve Bank of St. Louis from 1998 to
2008, when he was succeeded by James Bullard.
The conference, titled The Financial System, Banks & Economy: After the
Storm...Where Are We Now?, featured banking analysts and economists weighing in
on the state of banking system and economy amid the government's efforts to prop
up both.
-Romy Varghese, Dow Jones Newswires, 215-656-8263, romy.varghese@dowjones.com
(END) Dow Jones Newswires
04-30-091318ET
Copyright (c) 2009 Dow Jones & Company, Inc.
|