Fed's Powell says existing rules could end too-big-to-fail

WASHINGTON, March 4 Mon Mar 4, 2013 2:19pm EST

WASHINGTON, March 4 (Reuters) - U.S. financial regulators need time to demonstrate that their plans for ending too-big-to-fail will work, although tougher measures could be needed down the road, Federal Reserve Governor Jerome Powell said on Monday.

In the wake of the bank bailouts of the 2007-2009 U.S. financial crisis, regulators have been working on tough new rules to shore up banks' safety, such as requiring them to meet higher capital standards, and on plans for how to wind down failed banks that are deemed too large to go through bankruptcy.

But critics have said the government should do more, with many calling for regulators to break up the biggest banks.

Powell told an international banking conference that the new rules, many of which are still being finalized by the Fed and other bank regulators, should help reduce perceptions that the U.S. government would again bail out a giant failed firm.

"My own view is that the framework of current reforms is promising, and should be given time to work," he said. "In any case, too-big-to-fail must end, even if more intrusive measures prove necessary in the end."

Washington buzzed last summer about the possibility of cracking down on bank size after former Citigroup chief executive Sandy Weill said regulators should break up the biggest firms.

In recent weeks, politicians, industry groups and regulators in Washington again have begun debating whether regulators have done enough to make sure the biggest banks could fail without destabilizing the financial system.

U.S. Senators Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican, said last week that they planned to introduce legislation that would tackle the issue.

Brown has previously proposed changes such as capping big banks' non-deposit liabilities, an idea that has drawn support from some current and former regulators.

Powell said such a cap on short-term liabilities could allow firms to diversify activities while forcing them to rely on more stable funding sources.

But he pushed back against others who have proposed breaking up banks outright, which he said "would likely involve arbitrary judgments, efficiency losses, and a difficult transition."

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