The Federal Reserve’s new No. 2 official says regulators must continue to work to end the need for the government to bail out big banks in a crisis. Stricter capital requirements, rather than breaking up the biggest banks, is the better remedy, he says.
Stanley Fischer, who became vice chairman of the Fed last month, made the remarks Thursday in his first speech since joining the central bank. He appeared to align himself with recent comments by Fed Chair Janet Yellen that signaled a key focus on bank regulation for the Fed under her tenure, to prevent the kind of risk-taking that triggered the 2008 financial crisis and nearly toppled the global banking system.
Fischer, a former official of the International Monetary Fund and a head of the Bank of Israel, said regulators “need to be vigilant” in trying to prevent the next crisis — “and there will one.”
That next crisis “will not be identical to the last one,” and regulators have to work both to foresee it and to prevent it, Fischer said in his speech to a conference of the National Bureau of Economic Research in Cambridge, Massachusetts.
Progress has been made in the U.S. toward reducing the chances of future big-bank failures, by regulators raising capital requirements for banks and subjecting them to periodic “stress tests,” Fischer told the private research organization.
Breaking up the biggest banks “would be a very complex task, with uncertain payoff,” he said. He noted that Lehman Brothers, whose collapse was a signal event in the onset of the financial crisis in the fall of 2008, was a large Wall Street institution but not one of the giants, though it was closely connected with many other big banks.
Yellen said in April that the largest U.S. banks may need to hold additional capital to withstand periods of financial stress. Non-banks with deep reaches into the financial system might also need to meet tougher rules, she said. Such firms range from money-market mutual funds to private-equity and hedge funds.
At the same time, Yellen said the Fed would review the likely effects of imposing stricter rules on banks. Banks and their advocates have warned that further tightening bank regulation would lead to reduced lending to businesses and could slow economic growth.
Last week, Yellen said she doesn’t see a need for the Fed to start raising interest rates to defuse the risk that extremely low rates could destabilize the financial system.